Part 7 in the Continuous Accounting Series.
As part of our ongoing continuous accounting series, in this blog we’ll cover how you can prepare your organization and financial close process for the upcoming revenue accounting changes of IFRS 15 and ASC 606 (expected to become effective on January 1, 2018).
All companies track and report revenue. Organizations worldwide will need to start complying with new regulations for revenue accounting that were approved by the FASB and the IASB. This will be a very big change for many companies, both public and private.
The new revenue accounting regulations are complex and should be addressed according to an organization’s specific requirements. No software solution, not even one from SAP, should be expected to address the full set of requirements out of the box.
The burning question is: “What can I do now to get ready for the new standard set to go into effect on January 1, 2018?”
Here are five things that we learned about approaching the new revenue accounting standards. These are based on customer feedback from the Early Adopter Care program for SAP solutions related to revenue accounting.
1. Start a proof-of-concept (POC) now and use an iterative project approach.
For those just starting to tackle an IFRS 15 or ASC 606 project, we still recommend the best practice of starting with a proof-of-concept (POC). The recommended timeline of the POC is six to eight weeks covering five to 20 revenue scenarios using an iterative project approach. Start with one revenue scenario, then add another, then another in an iterative fashion until the time is up.
The timing and nature of the new revenue accounting standards have yielded a very interesting observation among the companies rolling out solutions to assist in their compliance efforts. Those companies taking an iterative approach are making better progress than those taking the “big bang” approach. This has led us to the conclusion that this is not a “big bang” project. To be successful, organizations will need to work in iterations across accounting, technology (systems), and people (processes). For example, as the accounting teams are working on the technical accounting requirements, the IT teams can be working on portions of the systems based on requirements that are already defined, and the business owner can be working on identifying the additional new business processes not already defined.
The iterative POC has several benefits. First, after this POC is complete, organizations will have started the process of learning how to work together effectively on tackling the new regulations. Second, the organization now has a much better estimate of how long each revenue scenario will take to implement. This yields much better estimates for the next project steps. Third, organizations can now more accurately forecast what revenue scenarios can be automated by January 1, 2018, and which ones will need manual workarounds.
2. Learn the new accounting standards now, if you have not already.
The new revenue recognition standard will have an effective date of January 1, 2018, for most companies in all industries – not just high technology, which currently already uses some aspects of the new regulations – and will dramatically change the process. The five-step process for revenue recognition is brand new and must be followed, so start preparing now.
The technical accounting assessment has to be done in advance of implementing any systems. Customers have asked us to provide software, but when they don’t yet have the accounting and parallel reporting requirements finalized, they end up not being able to implement it. As explained in No. 1, this technical accounting assessment will probably be broken down into smaller work segments and iterated with other IT systems and business process workstreams.
So our recommendation is to start training your revenue recognition personnel now. From my experience, it takes a U.S. GAAP-trained accountant about six to 12 months to really get comfortable with a principles-based standard such as this. We also recommend using an accounting adviser to help accelerate this process and provide your organization with a broader set of experience.
3. Excellent collaboration among key stakeholders is a necessity: IT, corporate finance, audit, and the accounting adviser.
The nature of adopting this new standard is iterative, as explained in No. 1 above. To successfully navigate the required activities and tasks, excellent teamwork and collaboration are needed across IT, corporate finance, audit, and the accounting adviser. We cannot stress this point enough. Teams should be co-located as much as possible with regular checkpoints daily. Individual teams will of course have to work on certain activities independently, but usually not for very long without a sync point. The teams will frequently have to communicate their results to the other team members so that the whole team can make progress on the overall project.
4. The technical accounting assessment has to be completed upfront or in advance of implementing the system or any parts of the system solution.
We have had several customers ask for a software solution only to realize that their requirements weren’t mature enough for a successful software implementation. This brings us to recommendation No. 4. The new standard has to be understood and converted into requirements before any IT system improvements can be made. As noted in No. 1, this will probably occur in an iterative approach, and as noted in No. 2, an accounting adviser can help accelerate this process.
Moving forward, 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. Judgments and estimates will require periodic updating.
5. Revenue recognition will also have impact on parallel reporting and on the financial close. Be well prepared to handle such situations in advance.
We have had some customers figure out the technical accounting assessments of the new standard, but then they didn’t have a clear parallel reporting strategy completed. Now, there is some dependency between the two, meaning choices under the new standard may impact your parallel accounting strategy. But companies need to be aware of how these choices impact their parallel accounting strategy and consider various options as part of their overall planning. Our recommendation is to include the parallel reporting considerations and potential financial reporting impacts upfront as soon as possible during your project.
The new standards for revenue recognition are considered by many the biggest accounting change in years. For a smooth transition, early preparation is not only recommended by experts, but crucial for successful compliance.