The Revenue Accounting Doomsday Clock Is Ticking

Pete Graham

The IFRS 15 doomsday clock is ticking. By January 1, 2018, IFRS 15 (or ASC 606 in the U.S.) for revenue accounting will come into effect globally. Most companies will have to be ready by this time to report on this new standard, and to provide the required details to their investors and auditors. And the regulation agencies are watching closely.

We have reached a critical time in the journey to IFRS 15 adoption, as it takes about 18 months for any given company to handle such a significant accounting change. I speak at many customer events around the world, and I always ask the people in the room: who has completed their work on the new revenue standard? I consistently see only a quarter of the room – or less – answering yes. So I will pose this question to you: Is your organization ready for IFRS 15?

To get started, you first need to understand the accounting aspects, including a five-step process outlining how to recognize revenue under the new standard. This is done via a technical accounting assessment of the revenue contracts that fall under the new standard. Depending on the size and structure of the company, the technical assessment can take from several months to more than a year. Once companies are up to speed on the accounting piece, they need to start drilling into the broader organizational and system aspects, and figure out the best approach to implement a system capable of handling this change.

To learn more, watch this video.

In my previous blog, 5 Steps To Prepare for New Revenue Recognition Standards, I shared a few recommendations to take into account as you get started, which I’ve summarized here:

1. Use an iterative approach

Companies that take an iterative approach are making better progress than those taking the “big bang” approach. To be successful, organizations will need to work in iterations across accounting, technology (systems), and people (processes).

2. Start learning the new accounting standard today

The upcoming five-step process for revenue recognition must be followed and comprises a brand-new accounting process. We recommend that you start training your revenue recognition personnel now. We also recommend using an accounting advisor to help accelerate this process and provide your organization with a broader set of experience.

3. Ensure excellent collaboration among your stakeholders

Teamwork and collaboration are needed across IT, corporate finance, and the accounting advisor to successfully navigate all the activities required. To make fast progress, teams should be co-located as much as possible, as they will have to frequently communicate their results to the broader group.

4. Complete the technical accounting assessment in advance

Before an IT system improvement can be made, the new standard has to be fully understood and transformed into requirements. Your organizations will be required to capture key data from all sales contracts related to revenue with a customer. Revenue recognition, however, can be extremely fluid, especially as contract terms get amended or new performance obligations are added.

5. Account for impact on parallel reporting and the financial close

The choices you make under the new standard may impact your parallel accounting strategy. Therefore, you need to consider various options as part of your overall planning. We recommend including the parallel reporting considerations and potential impacts up front and as soon as possible during the project.

Learn more on how to get started here.

 

 


Pete Graham

About Pete Graham

Pete Graham is the director of Finance Solutions and Mobility at SAP. He is the solution management expert for Office of the CFO topics including SAP S/4HANA Finance, and is solution management owner for accounting change topics such as IFRS, revenue recognition, revenue accounting, lease administration, lease accounting, and others, as well as general ledger and mobility solutions.