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Implementing the new revenue standard
(ASC 606 or IFRS 15)
For many companies, implementing the new standard will have less of an impact because of their business arrangements or current accounting method. But for others, the change could significantly affect their current systems and processes, and it could have a material impact on their financials.
April 4, 2017
A blog post by Mark Horn, principal, Deloitte Consulting LLP, and David Pierce, managing director, Deloitte Consulting LLP*
In our conversations with clients about complying with the new revenue reporting standard, we’ve seen that many organizations tend to fall into three broad buckets:
- They’ve been tracking the standard for years and have already taken tangible steps to be compliant under their desired adoption method. (See the previous post, “Adopting the New Revenue Standard.”)
- They’ve reviewed the standard and understand how they’ll be impacted. But they aren’t sure how to best comply and mobilize toward the 2018 date.
- They know the standard is out there and that they have to do something. But they’re really unsure of the impacts and implications.
This discussion will focus on group two. We’ll talk about group three in subsequent posts.
For many companies, implementing the new standard will have less of an impact because of their business arrangements or current accounting method. But for others, the change could significantly affect their current systems and processes, and it could have a material impact on their financials. Companies that are more heavily affected tend to have a large volume of contracts, often with inconsistent and non-standard terms, with products and services bundled, creating multiple performance obligations. If your company falls into this category, a manual solution isn’t sustainable or scalable as your business grows and evolves. You’re looking at a moderate to large program to be compliant.
Below are seven key lessons we’ve compiled while helping a range of companies. They’re in no way universal and will hit each company differently. But the principles are consistent across industry and company size.
- Get organized. This may seem trite, but many organizations don’t have a defined revenue recognition program. Or it’s managed only in technical accounting or the controller organization. This change calls for a complex and far-reaching program, and it needs to be managed and structured as such.
- Don’t get lost in the contracts. With thousands or tens or hundreds of thousands of contracts, the notion of understanding every arrangement and material impact is overwhelming. Prioritize by revenue size and materiality of accounting impact to narrow the scope.
- Engage IT early. There can be a hesitancy for accounting or finance to engage IT until all the accounting policy decisions are made. That’s too late. Engage IT early, especially if you’re looking at a commercial tool to help with compliance. It will save time and facilitate the design process down the road
- It’s all about the data. The most complex part of compliance, by far, is identifying, sourcing, and processing contract information. The commercially available tools for compliance all require clean data in very specific formats. Even if you’re lucky and this information is neatly stored in a handful of systems, a significant effort is still needed to format that data for consumption. But most companies we encounter aren’t that lucky. Even when the data is accessible, it’s inconsistent and doesn’t always represent the latest arrangements with a customer.
- Think BI—not ERP. If you decide to implement one of the commercially available tools for compliance, the temptation is to treat the project like an enterprise resource planning (ERP) upgrade. But what’s required is more akin to a business intelligence (BI) project with a large focus on getting the right data, applying business rules, and either posting or reporting on the results. Whatever tool you use, it’s a custom exercise.
- Balance compliance and transformation. There’s a temptation to use compliance as a driver for addressing long-standing challenges in business processes. While revenue recognition can serve as a great opportunity to improve business operations, this desire must be carefully balanced against the very real deadlines that are approaching. It’s critical that the team understands the scope for core compliance and the scope for business improvement. Then, as the project evolves, budget and priorities can be managed effectively.
- Don’t shortchange change. Even for companies where the standard is less material, new processes will still be required within accounting, changes to controls and reports, and new disclosures/footnotes. Your external auditor will need to understand and review the changes. Don’t underestimate the time and resources needed to prepare the broader finance function and others for what the standard represents.
In future posts, we’ll dig deeper and share our thoughts on how to manage risks and make certain technology decisions.
*Note: The views expressed in this blog are those of the bloggers and not official statements by Deloitte or any of its member firms.
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