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Active Planning: Your Secret to ASC 606 Compliance

ASC 606 Compliance

“It was the best of times, it was the worst of times.” So begins A Tale of Two Cities, Charles Dickens’ famous novel of the French Revolution. With the new revenue recognition criteria (ASC 606 compliance), it may seem like the worst of times for financial planning and analysis

Part of the stress is a time crunch. For public companies, the deadline for implementing the new rev-rec rules (as we call them) is past. Private companies have less than a year—not much time in the finance world! Restructuring your accounting processes to accommodate the new guidelines within that time frame is only half the battle. Finance teams need to accurately show what the financial forecast looks like with the new standards in place, so executive teams can make better and more informed strategic decisions regarding the future prospects of the company.

However, professionals have focused mostly on the accounting side of the equation and paid very little heed to the impact that the rev-rec rules will have on the FP&A function, Robert Kugel, senior VP and research director at Ventana Research, notes in an April 2017 Linkedin article. He adds, “Planning and budgeting will become more complex because of the divergence in the timing of accounting and ‘real’ events. FP&A organizations in these corporations need to prepare now to cope with the new environment.”

Au revoir, spreadsheets

The now that Kugel speaks to has come and gone, but the obligation to adhere to the new regulations remains. If you’re still scrambling to implement the new criteria, spreadsheets will only hold you back.

In fact, Kugel writes: “ finds that two-thirds or more companies use [spreadsheets] to manage their budgets and other functions that can impact revenue recognition planning. Their planning models and data reside in desktop spreadsheets scattered across individual computers and file servers. In some cases, the information may also be in one or more enterprise applications. Manually pulling together these individual strands in spreadsheets on a regular basis is time-consuming and error-prone.”

Tell a tale with active planning

Instead, Kugel recommends what he calls a “dedicated planning application,” software that:

  1. Provides access to all of your business units’ plans
  2. Simplifies collection of data
  3. Enables analysis and drilling down into detail
  4. Provides dashboards that are easy to create and modify
  5. Supports automated and self-service reporting

We would go further and recommend a system that enables, one that:

  1. Enables better collaboration: Active planning encourages broader participation across the organization, by leveraging technology that makes it easier to establish a single source of shared data and customized dashboards that give users ready access to information. Now, the entire company can be more proactive around the revenue plan, rather than simply sitting back and hoping tactical decisions have the intended effect.
  2. Provides comprehensive capabilities: A single, comprehensive process drives optimization widely across the diverse parts of the business and the organization. You can reap huge benefits from real bottom-up planning and develop a robust picture of the business. For example, you can create two models—a forecast for what financials look like under the 605 regulations and a second forecast projecting the financials under new 606 requirements. Your management team and key stakeholders will have a far better view of what the future will look like in the 606 world and can make more accurate, data-driven decisions about the business moving forward.
  3. Continuous planning: Plans are produced rapidly and can be quickly iterated so ongoing, real-time planning and become the norm. FP&A professionals can provide insights to help the business respond rapidly to changing market conditions or competitor activity. This flexibility is critical with the new rev-rec criteria. Given the high level of judgment in ASC 606 and various alternative treatments and practical expedients available, your FP&A and accounting teams can build various what-if scenarios within the automated planning system to better understand the financial impact of various alternatives.

Kugel concludes: “Our research shows that companies that use a dedicated application more often have a process that works well or very well than those that use spreadsheets (60% vs. 47%). A dedicated application is essential to support complex planning processes.”

No matter how far along you are in adopting the revenue recognition criteria, your FP&A team can bring real value through leveraging cloud technology and your strategic insights. The future is yours, and with the right tools, you can tell a tale of success.

RKL Team

Written by RKL Team