Things to Consider When Adopting ASC 606 Revenue Recognition
When it comes to the new revenue recognition criteria, CFOs have to answer some complex questions. How will adopting ASC 606/IFRS 15 revenue recognition guidelines affect your overall organization—IT, HR, and legal, for example? What are the costs? How can you communicate the impact to external stakeholders? The deadlines for compliance have either passed if you’re a public company or are quickly approaching if you work in a private organization. Either way, the pressure to make the transition from the old to new accounting standards is intense.
A CFO might provide a “checklist for success” to assist their financial officers and teams helping them move forward with confidence into 2018 and beyond. Some of these include:
- Consider your existing contracts and identify any features or terms that may require additional analysis under the standard’s five-step approach. For example, contracts that provide customers with both a good and a service must be assessed to identify the separate performance obligations.
- Evaluate your ability to collect and maintain the data necessary to comply with the standard given your company’s processes and systems. If you track information at the contract level, for example, you may have to either aggregate contracts or separate a contract into parts in order to account for revenue.
- Determine where the standard requires you to make additional judgments, including estimates. In general, the new standard requires more judgment from management than under prior guidance because it represents a shift from a detailed, rules-based approach to a principles-based approach.
- Put processes and controls in place to make these judgments and adequately support them through documentation. Your company’s estimate may be scrutinized by the Securities and Exchange Commission or other regulators.
- Reevaluate how your customer contracts are priced. For instance, you may decide that operations will be more manageable going forward if your company updates its contract pricing to better align the timing of billing and the timing of revenue recognition under the new standard.
- Prepare an analysis of how the new standard will affect the company’s bottom line. This analysis will not only give insight to management but also prepare the company to communicate with stakeholders regarding the potential effects of the standard on its results.
Look to the cloud for support
According to CFO, “most organizations let their ERP system do the best it can and supplement with spreadsheets or homegrown solutions to solve what the ERP system cannot—not the most efficient method. It is common to find organizations recording a significant portion of their revenue transactions using non-ERP source systems.”
This do-it-yourself approach won’t fly when it comes to managing contracts, collecting data, automating processes, or completing a financial analysis. To reduce the cost and complexity of adhering to the new standards, savvy CFOs are turning to cloud-based financial management system such as Sage Intacct.
For example, templates and schedules in Sage Intacct mean your team can automatically recognize revenue according to accounting standards. The system lets you recognize revenue and amortizes expenses, even as subscriptions and contracts change. Dual treatment of contracts according to both old and new revenue recognition criteria provides you with immediate visibility into how the guideline changes affect your financials.
The new accounting standards are complex, and transitioning your systems to support them requires the help of an expert. Trust the professionals at RKL eSolutions (make no-follow) to help you design and implement a solution that can help you come into compliance efficiently and economically. Your team and your company will thank you.