ASC 606/IFRS 15. These revenue recognition criteria have been called the most sweeping change to accounting in decades. Deadlines for compliance are fast approaching—January 2018 for calendar year-end for public companies and January 2019 calendar year-end for private companies. Businesses, especially those that sell subscriptions or contracts, need to act now.
First, you must decide how your company will adopt the new ASC 606 revenue recognition standard by deciding if your company will use a full retrospective approach or modified retrospective approach. The full retrospective approach involves a restatement of all comparative periods presented in your financials and recognizing the cumulative effect of ASC 606 at the start of the earliest period presented.
With the modified retrospective approach, your company presents the comparative periods in legacy GAAP (i.e., 605) and recognizes the cumulative effect of 606 on the date of the initial application of the new guidance. Companies are also required to present the quantitative impact and significant changes between the financials under 606 and legacy GAAP during the period of adoption.
Forecast two futures
- One of the most valuable benefits your financial planning & analysis (FP&A) team can add to the 606 process is forecasting capabilities. As you work toward 606 compliance, your company would benefit from seeing what its financial forecast would look like if the new standards were in place. For instance, with an automated planning system, rather than a single-user spreadsheet, 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.
- Unlike the competition, your management team and key stakeholders will have a far better view of what the future will look like in the 606 world. These comparative forecasts will not only help inform decision making but can also help strengthen the bridge between accounting and FP&A. You can leverage your accounting team’s expertise to build the 606 forecasting model. In addition, given the high level of judgment in 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. This would help management make more informed decisions and improve predictability of the numbers.
Get Robust Reporting
No matter which method you choose for implementing the new revenue recognition standard, Adaptive Insights offers a complete platform—from modeling to reporting to dashboards—to help in the transition. Organizations that opt for the full approach will be able to leverage the Adaptive Suite’s integration platform to quickly bring in restated information and provide the reporting needed to run the company.
Organizations that opt for the modified approach will face a potential reporting challenge in that they will not automatically have year-over-year results for comparative analysis and to track trends. Yet Adaptive Insights offers an easy work-around. Even if you’re not going to restate the numbers in your ERP system, you can still model them out in the Adaptive Suite. Now you can show leadership and internal stakeholders what the financials look like from a comparative year-over-year perspective.
Create better KPIs
Changing processes tend to have multiple consequences. A prime example is the potential KPI and key metric impact that will flow from 606 requirement changes. Clearly, some of your key metrics and KPIs will require revision along with accounting standard changes. For instance, important aspects of your business, such as how you measure sales productivity, will be altered beyond the mere accounting change.
The ability to effectively identify, track, and measure KPIs and then provide visibility via dynamic dashboards will be critical in the post-606 era. Armed with fast, easy, and powerful cloud capability, your FP&A team will be able to add significant strategic value in terms of identifying the right KPIs under 606 standards, and then providing ongoing measurement and analysis that is sure to help make the transition as smooth and successful as possible.
Ease the transition to ASC 606 with RKL
The ability to effectively identify, track, and measure KPIs and then provide visibility via dynamic dashboards will be critical in the post-606 era.
No matter where you are in your 606 journey, your FP&A team can bring real value through leveraging cloud technology and your strategic insights. And with decades of financial accounting expertise, the professionals at RKL eSolutions can help ease your transition to the new revenue recognition criteria. Contact us today!