The Financial Accounting Standards Board’s (FASB) recently issued and lengthy revenue recognition standard is intended to promote greater comparability of financial information across companies, industries and geographic areas.
For many organizations, the new rules could mean significant modifications in the timing and amount of revenue recognition.
This accounting change won’t stop with financial reporting though. Its sweeping impacts will ripple through any operational team, process or system that contributes to or relies on revenue. This means your sales, tax and IT departments, among others, could be affected.
You don't want to be caught off guard when the new guidance takes effect. You can avoid surprises by assessing impacts in manageable segments. Keep these four areas in mind as you make the transition:
1. Processes and controls
Processes: Can your existing accounting processes provide the necessary information to complete the new five-step model** and meet expanded disclosure requirements? Do you need to implement new processes to collect and report additional data? For example, if your delivery cycles are long, you may need to account for the time value of money under the new rules.
Controls: In light of any process changes, do you need to modify existing internal controls or implement new ones?
2. Systems and data
Internal IT systems: Can your IT systems collect and report the necessary data for compliance with the new standard? You may need entirely new systems, or new data flows within current systems, to meet the new disclosure requirements.
External systems and data: Are your vendors aware of the new rules from FASB and what changes may be necessary to maintain compliance? Do you need to engage new vendors to capture the required data?
Timing: Do you plan to adopt the new standard retrospectively? You’ll need to gather revenue data for each prior reporting period presented in the year of adoption and retrospectively apply the new five-step model. This could make data-gathering capabilities a pressing consideration.
3. Methodologies and policies
Accounting: The new revenue recognition standard focuses on the transfer of control rather than on risks and rewards. It also requires management to apply significantly more judgment — versus rules — to make decisions and estimates. These changes could mean important amendments to your revenue policies, as well as additional related disclosure.
Business operations: The new rules may change the timing, amount and character of revenue recognition for many organizations. Software companies, for example, are likely to recognize revenue faster than they did under the old rules. Do you need to tweak contract language and policies, product/service bundling strategies, and sales compensation and bonus plans to make sure financial goals are met while also achieving compliance?
Debt: Carefully review debt covenants tied to performance-based measures. Significant financing components, for example, could change interest income and expense and impact EBITDA, even if they don’t impact your bottom line.
Tax: Book/tax differences and deferred tax assets and liabilities could be affected by the new rules from FASB due to the revenue recognition timing. Your tax and accounting departments will need to work together to assess impacts and implement appropriate adjustments to your tax planning strategies.
Training: Educating the people in your organization on the new rules will be critical for maintaining compliance. Consider what training may be necessary to ensure each stakeholder group knows how the new rules apply to them.
Internal skills and resources: Given the complexity and pervasiveness of the new standard, assess your staff’s skills. You may need to allocate additional resources to an internal audit, for example, to address the increased risk of material misstatement that goes along with adopting a new standard.
Communications: Internal communications regarding new systems, processes, policies and training likely will be necessary. You may also need to communicate with external stakeholders such as investors, who will want to know the potential impacts of transitioning to the new FASB standard.
A challenging road ahead
According to a recentProtiviti Flash Report, “The new revenue recognition guidance will challenge even the most experienced of financial statement preparers.” But the journey will be worth it, as FASB’s new revenue recognition standard is intended to significantly improve the comparability of financial information in the global marketplace, streamline applicable guidance and ultimately, provide more useful information to financial statement users.
*Note: Implementation of FASB’s new standard is slated for reporting periods beginning after December 15, 2017, for public companies (December 15, 2018, for nonpublic companies and organizations).