If you’ve been wondering how new FASB revenue recognition rule, ASC 606 (ASU 2014-09), and IFRS rule, IFRS 15 are going to affect your accounting team and processes, follow with us over the next few articles to get better prepared for what looks to be a big change. Lack of readiness could leave you open to a multitude of issues, including reduced accounting productivity, unforeseen revenue impact, and even risk of restatement. The new rules impact your revenue recognition across a broad range of contractual agreements with customers. For example, companies with bundled products and services, variable discounts, different payment and renewal terms, sales commissions, royalties, or other specific contract commitments need to be ahead of the game in understanding the new rules.
Does your accounting system separate and time revenue and related expenses according to the new rules automatically? Does is offer transparency to help finance and accounting understand the impact on the income statement? If not, accounting teams will get dragged down into the weeds of ever-increasing the contract and spreadsheet detail – wasting time and creating significant compliance risk.
“The standards will likely affect entities’ financial statements, business processes and internal control over financial reporting. While some entities will be able to implement the new standards with limited effort, others may find implementation to be a significant undertaking. Successful implementation will require an assessment and a plan for managing the change.”
Source: Ernst & Young
Subscription based software companies will find these rules especially relevant. Companies who have extensive contract negotiation cycles will have to document everything – from sales, to service, to finance. They will find that contract items like discounts, payment and renewal terms, multiple inter-related contracts, activation fees, and even sales commissions can make a profound difference to how revenue and expenses look under the new rules. In a nutshell, accounting systems need to be more connected, more intelligent, more automated than ever before.
We’ll dive deeper into the specifics of what a system needs to do in upcoming articles. With sixteen AICPA working groups assigned to the new rule, its impact is clearly broad.
We’ll finish out this series by looking at steps you can take to make sure your company is compliant. These steps help you, first, understand where you’re exposed and second, plot the best path to adoption. We’ll start by providing you with a clear perspective on the new rules and what it means to software companies in particular. Then we’ll share what functionality you need to look for in your accounting system to ensure it’s ready to handle this new level of complexity.
The clock is ticking to adoption
With ASC 606 and IFRS 15, there are a number of dates to think about. For public companies it’s effectively 2018, while for private companies, adoption begins for accounting periods starting mid-December 2018 or later. Although the effective date is still a few years out, with retrospective adoption, it applies to contracts prior to the adoption date, with the need to show comparative financial statements in the years prior to adoption.
If you’re a private company, you may think you’ve still got plenty of time. But the reality is that contracts you are writing now will likely be impacted by the new rules, so it’s essential to make sure you are running your revenue recognition processes smoothly when the time comes. In the meantime, you need to understand the potentially significant impact on revenue, by comparing old versus new sooner rather than later.
The new standards provide accounting guidance for all revenue arising from contracts with customers – from goods to services. For contracts your organization is writing today, for those that already extend into the adoption date, or for those that have renewal terms, you need to understand how they look under the new rules. The key is to (1) understand your exposure, (2) compare revenue under existing and new rules, (3) adjust the business processes that delay revenue, and (4) reduce compliance risk through automation.
“The core principle is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”
While some companies will be able to implement the new standards with limited effort, most will find it a significant undertaking, especially if their internal accounting systems lack built-in readiness. Successful implementation will require an assessment and a plan for managing the change.
“As a result of the new standard, entities will need to comprehensively reassess their current revenue accounting and determine whether changes are necessary.”
Our step-by-step guidance will keep your revenue processes out of the spreadsheet mire and moving forward with greater automation and transparency than ever before.
The new ASC 606 and IFRS 15 accounting standards—some of the most far-reaching changes to accounting since Sarbanes-Oxley—are only a few quarters away. Get ASC 606 Resources such as news, assets, and learn about the advantages Intacct provides in helping you address these changing rules with Intacct Contract Revenue Management and Contract and Subscription Billing.