Revenue recognition might be the most important item on your business’s financial statement – and it’s about to radically change. A newly converged standard of revenue accounting is coming at financial organizations like a freight train. IASB and FASB have merged accounting standards – detailed in 700 pages of new rules. The changes are so seismic that companies are being given a little more than two years to put the rules in place.
In a recent SAP Game-Changers radiocast, panelists Chris Smith of capital markets and accounting advisory services at PwC; David Ferguson, director in the consulting technology service area at Deloitte; Pete Graham, director in finance solutions and enterprise mobility at SAP; and Julie Zielke, a partner in EY’s financial accounting advisory services practices in Chicago, discuss the potential impact of these new regulations.
No time like the present to plan for the future
The new revenue recognition guidelines require substantial disclosures around revenue – requiring different, enhanced preparation of computations and data, particularly for companies with long-term contracts. They’re currently set to take effect in December 2017 for U.S. public companies and January 2018 for companies that use IFRS standards.
Smith details the challenges that companies face in the area of revenue recognition:
- Everyone in the company has an opinion about it because it drives compensation and other crucial metrics.
- Revenue recognition touches many of the organizations outside finance, such as sales, tax, and IT. Because of the strict rules in the U.S., revenue recognition has either constrained or driven the way some businesses go to market.
Ferguson urges companies not to count on the year-long reprieve they’ve been given. He maintains that time is still of the essence. There are significant impacts within the organization to the financial statements and the tax reporting that can affect compensation, goals, and metrics within the firm.
No need to do it all at once
Because the change is so large and drastic, the experts agree that implementing the new standards and adjusting to their effects will be an iterative process. Ferguson states that the rules will likely continue to refine themselves over time. Also, many of the companies can change the way they write their contracts between today and the implementation time.
Smith details how challenging the new standards will be for U.S. companies because of the strict regulatory environment and how much importance they place on revenue recognition. American businesses are hesitant to make guesses or estimates where that number is concerned because it has a domino effect on so many other areas of the business.
So what measures should you take now to make the conversion a success later?
- Create a clear policy that IT can use to scale a large number of transactions.
- Undertake a comprehensive education program that brings the investor community up to speed on what this revenue recognition shift means to them.
- Participate in peer conversations and industry collaboration across companies that can help everyone adjust and thrive.
To learn more about how you can prepare for the new revenue recognition standards, listen to the full radiocast.