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New Revenue Recognition Rules Are a Necessary Pain

Nov 29th 2016
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Nobody ever said change was easy. But the most successful businesses constantly embrace change. One of the biggest changes to the accounting world will soon take place, and businesses will have to adapt if they want to thrive in the future.

The new ASC 606 revenue recognition guidelines will go into effect starting in 2018 for public companies and 2019 for private companies. These guidelines will eliminate current transaction- and industry-specific guidelines under US GAAP and replace them with a principle-based approach for determining revenue recognition.

According to the American Institute of CPAs, the new standard has the potential to affect every entity’s day-to-day accounting, as well as the way business is executed through contracts with customers.

Though these standards set forth by the Financial Accounting Standards Board do not take effect for at least one more year, any company that has current customer contracts extending into 2018 and beyond will feel the impact almost immediately. These businesses must begin recasting their prior-period statements to adhere to these new guidelines in advance of the deadline so that they can properly provide comparative and future guidance to investors.

To gauge the preparedness level of businesses, Intacct recently surveyed a large number of finance professionals at businesses across a variety of industries. Given the scope of the changes, it is not surprising that 40 percent of finance professionals responding to the survey feel that preparing for and implementing the new accounting regulations will be a painful experience. These professionals even said they would prefer to sit in hours of traffic or burn the roof of their mouth with hot pizza than deal with the new standards.

Painful as it may be, accounting professionals must face reality and properly prepare their organizations for the change. These new guidelines are being implemented to make financial results more transparent and comparable, and to harmonize US accounting standards with international accounting standards, not to make their lives more difficult.

In fact, the new standards will ultimately improve revenue recognition reporting. That’s why finance departments need to stop procrastinating and begin the preparation process now.

The Intacct survey found that 54 percent of finance professionals have not even begun assessing their ASC 606 implementation, while 36 percent don’t even plan on addressing it until the standards go into effect. Even more disturbing, 24 percent are not even sure when they will begin the process.

The impending revenue recognition standard will require an exhaustive review of a company’s contracting and accounting policies and processes – and this will most likely cause the business to rethink the way it handles procedures and systems. In fact, just 16 percent of survey respondents think their current enterprise resource planning/accounting software will automatically handle the requirements of the new ASC 606 guidelines.

Companies with even moderately complex customer contracts are going to find that the new rules will have extensive impacts best dealt with by software designed specifically to handle the new requirements. Many of the leading accounting software providers have either launched solutions to automatically manage revenue recognition and reporting under the new guidelines or have announced plans to do so. Now is the time to evaluate if the software at your company, or your client’s company, can handle the transition.

Organizations that wait until the last minute will have a rude awakening come 2018. Remember the traumatic transition to Sarbanes-Oxley? Many folks will recall how painful those changes were and the massive burden that SOX placed on finance and internal audit teams.

The world is constantly changing and evolving, as are accounting standards. Though it may be a pain to adhere to the new revenue recognition guidelines, businesses that persevere will save themselves considerable headaches down the road. It cannot be stressed enough: Businesses need to begin adapting today for a pain-free tomorrow.

Related articles:

Why the Subscription Economy Must Prepare Now for New Accounting Rules
For Revenue Recognition, ‘Don’t Sleep on the Disclosures’
Understanding the Revised Accounting Model for Revenue Recognition


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