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Cognitive technology to comply with new accounting standards
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Two new accounting standards—revenue from contracts with customers and leases—may be the most significant changes to US Generally Accepted Accounting Principles (GAAP) in many years, affecting many US companies. While the compliance task may seem monumental, analytics and cognitive technologies can greatly accelerate compilation, evaluation, and decision processes—and ultimately, compliance.
The new accounting standard for revenue is just the beginning—changes to lease accounting are up next
Calendar year public companies must comply with the revenue from contracts with customers accounting standard beginning January 1, 2018, and the leases accounting standard beginning January 1, 2019. Private companies have an additional year to comply.
Companies—especially large multi-nationals—are likely to have contracts located all over the world, written in local languages and following local legal norms, stored on various computer systems and in file drawers. These are among the many factors that complicate the task of effectively assembling and evaluating contracts and agreements to reach accounting conclusions under these new accounting standards.
Even companies that believe that their financial statements will not be affected must go through the process to demonstrate that there's no impact, which could be time-consuming as well.
With deadlines fast approaching, companies need a way to expedite compliance, including centralizing and digitizing underlying records, while laying the groundwork for a more streamlined ongoing accounting process to support business decisions. Using analytics and cognitive technologies can help accelerate and support compliance of these new accounting standards.
Using analytics and cognitive technologies to support compliance
Analyze thousands, not dozens
Ensuring that contract terms are properly recognized under the new accounting standards requires evaluating a significant number of contracts. Cognitive technology can "read" the text and pull out key terms that inform the new accounting. Hundreds or thousands of contracts, written in various languages and formats, can be analyzed using cognitive technology in a fraction of the time required by less technically advanced methods.
Cognitive technology document readers continuously "learn" as they review more and more documents. This means that over time, the machine reader will encounter a decreasing number of exceptions that must be evaluated by a human.
By simulating human thinking using cognitive technology, companies can automate much of the process of determining the correct journal entries and identifying outliers. Of course, a technical accounting expert should guide the development, review, and testing to ensure reliability.
The effect of these new accounting standards goes far beyond financial reporting. Implementation will likely require a significant effort for many companies, demanding collaboration across IT, sales, tax, investor relations, and human resources. For global organizations, effective project management will require a deep understanding of global operations and capability to coordinate efforts across regions.
Smarter business decisions
While the transition to the new accounting standards may be difficult, company key stakeholders will likely gain lasting benefits. With contracts digitized and centrally located, they can see how the structure and terms of their current contracts drive their financial reporting, revealing potential opportunities for contract renegotiation and trends across customers and vendors. They may also be able to identify and correct inconsistencies across the company.