In my last blog, I reflected on the CFO’s role with world changes, which offers the perfect transition to a change that will impact businesses big and small: the updated revenue recognition accounting standard. This standard is known as International Financial Reporting Standard 15 (IFRS 15) and, for the U.S., ASC 606, which goes into effect January 1, 2018. It’s one of the biggest reporting updates with enormous implications.
When I first learned of this coming change, I felt relieved not to be in the accounting department anymore. The updates coming are enormous, fundamental even it seems at this stage, and the consequences go well beyond accounting. While some industries may not experience significant changes, others may have to consider revising business and contracting practices, go-to-market models, and their internal and external reporting.
What does this mean? For starters, as financial statements change, many financial ratios are affected as well. Employee incentives based on revenue or profit numbers, for example, may need to be revisited to avoid a negative impact on employees. The same applies to revenue-share arrangements that companies may have in place with vendors, agents, resellers, and partners, and covenants in loan arrangements that refer to revenue or profit numbers.
Companies are already exploring what they need to comply with IFRS 15. In my role at a software company, I need to understand this change since my own company and many of our customers will want my perspective. The closer we get to January 2018, the more I find myself becoming actively involved. Companies will face not only ensuring that their processes and financial statements are compliant; they’ll also need to educate employees in sales, management, and finance to help them effect the change, understand the changes, and the impact on their work and the company.
I’ve discussed the importance of CFOs providing the business with counsel in previous blogs. What’s interesting is that for IFRS 15, the SAP Finance function is more actively participating with our software developers than for any other topic before. Our financial reporting department was not only one of the most engaged and vocal participants in the due process leading to the new standard. They provided our developers with the IFRS 15 know-how needed to build a solution for our customers. They were closely involved to help the developers understand what they needed to deal with: the content, the impact on customers and industries. They also joined our developers in their outreach efforts to collect input from our customers. This is beyond just reviewing software. This is a much deeper collaboration that includes blueprinting, testing, internal rollout, and implementation.
It’s an interesting and fun situation. We have to live the changes and educate the community, while also working with customers and still shaping the interpretation of the standard as participants in respective discussions in the global accounting community. This is really unique at SAP, and it’s definitely on the CFO agenda. Every company will need to look at what the impact will be, and how to explain it to the financial community. While IFRS 15 does not require a full retrospective application of the new rules, companies will still need to evaluate what IFRS 15 would have meant to their prior years’ reporting to have proper comparisons and understand what the impact will be. This requires a few quarters, at a minimum, to check and prepare. CFOs will need to understand the new rules and how to spread the appropriate training throughout the company. It’s going to be quite a ride!