The Clock is Ticking on Revenue Recognition Adoption
As the effective date for the new revenue recognition accounting standard nears, US companies are scrambling to wrap up their impact assessments and take the next steps toward implementation and adoption.
According to a recent PwC revenue recognition survey, 65 percent of respondents said they are still in the assessment phase, and 22 percent haven’t even started. Only 13 percent said they have begun implementation.
But they don’t have much time left. Public companies have until Jan. 1, 2018, to transition to the new standard, Revenue from Contracts with Customers (Topic 606), which the Financial Accounting Standards Board issued in May 2014. Private companies have an extra year to comply.
Under the standard, companies under contract to provide goods or services to a customer will have to follow a five-step process to recognize revenue in financial statements that requires more judgments and estimates than previously used approaches.
So, more time and resources will be devoted this year to prepare for the new standard, as companies re-evaluate their finance technology systems to ensure they have the data and capabilities to not only assess but adopt these changes in an efficient, accurate, and cost-effective manner, according to Trish Coughlin, corporate controller for Workday, a provider of enterprise cloud applications for human resources and financial management.
“It’s a significant project,” she said. “No matter how good your systems or teams are, you’re likely to need outside resources to help. As with most things, the devil is in the details and they are important.”
Coughlin recently spoke with AccountingWEB about companies’ biggest revenue recognition implementation challenges, technology’s role in the process, and what accountants and other finance professionals should be doing now to get ready for the new standard.
AW: We knew once the revenue recognition standard was issued in 2014 that it would bring sweeping changes to how companies book revenue. How significant is the impact of these new rules?
Trish Coughlin: Like with most regulatory change, there is a great deal of work involved with adopting a new standard. In the case of revenue recognition, these are some of the most significant changes we’ve seen in the past few decades. This is in large part due to the amount of work required, but also because of the impact the changes will likely have on a company’s revenue – both historically and in the future.
AW: With the deadline to comply with the new standard looming, where would you say most companies are in the evaluation and adoption timeline? Have they already completed their assessments and evaluated the financial impact the new standard will have on their company and customers?
Coughlin: Given the amount of work and resources required, it’s not surprising that organizations are still ramping up, but it’s critical to not procrastinate. These rules are here to stay and the sooner organizations dig into the evaluation piece, the more prepared they will be and better able to communicate the financial impact of the new rules to key stakeholders.
AW: Has collaboration between company departments or functions been essential in this process?
Coughlin: Adapting to the new standard is a huge project plan that requires cross-functional planning; it’s not just accounting. Meeting with different stakeholders across the organization to discuss potential impacts has been an integral part of our planning. While the new standard is specifically focused on revenue recognition, there are broader implications across the business related to financial planning, expenses, sales operations, commissions, and more.
AW: What would you say are companies’ biggest implementation challenges right now?
Coughlin: While the new revenue recognition standard will bring consistency across the industry, the transition process is complex. There are a few challenges companies will probably experience, starting with understanding the intricacies of the changes, and the amount of work and resources needed in determining which strategy to select. These changes are no small undertaking, so it’s important organizations create a dedicated team to support the effort.
Additionally, similar to any significant change in compliance, companies will also need to determine if existing technology systems can support the new standard, and if not, what other technologies are necessary in order to effectively and efficiently select a strategy.
AW: For those companies that have fallen behind on implementation, what advice are you giving them so they can start getting up to speed?
Coughlin: Get started as soon as possible, and consider these changes as an opportunity to re-evaluate different processes and technology systems in your organization. Often times, while change can be difficult, it can also bring about positive transformation that companies should embrace.
AW: For those companies that are on track in their implementation efforts, what do you think are their secrets to success?
Coughlin: Starting early and having an organized plan of action is the key to success when it comes to any company’s planning process. There’s a structured approach you need to go through – organizations must anticipate, plan, and budget for the amount of time and resources it’s going to take to prepare for and carry out these changes.
Those companies that are on track have mapped out what they’ll need to do, identified existing and potential gaps, and started re-evaluating internal technology systems to determine whether they have the data and capabilities to both assess and adopt the changes in an efficient, accurate, and cost-effective manner.
AW: What would you say is technology’s role in helping companies prepare for and adopt the new standard?
Coughlin: In today’s dynamic business environment, it’s critical that organizations have the ability to quickly adapt. This transition should be looked at as a catalyst for change and an opportunity to rethink how the organization operates.
Ultimately, any change involves process and technology. Organizations need to look at what kind of tools they’re currently using and ask themselves if there are better options that can enable and streamline execution. The key lies within finding a tool that is flexible and configurable so you have a system not only for today, but also a system that’s adaptable as new standards and policies continue to influence the business finance environment in the future.
Having everything better documented in one system should create an easier auditing process for everyone and ensure there are no surprises upon calculating the impact, closing the books, and issuing financial statements. Having said that, don’t underestimate the operational perspective post-restatement or adoption. It is also a significant piece.
AW: A lot has been made about how companies are preparing for the new standard. But what should accountants and other finance professionals be doing now to get ready for the standard?
Coughlin: In addition to what I’ve already outlined, another key consideration in preparing for the new standard is auditing. There is a great potential that these new changes will affect a company’s financial statements. This change impacts both historical and future periods and transactions, so finance organizations need to work closely with auditing firms to evaluate their approach and ensure they are in lockstep through the entire transition process in order to avoid any unforeseen circumstances when closing the books.
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