The new revenue recognition rules (ASC 606 / IFRS 15) will go into effect on January 1, 2018 for public companies (2019 for private firms). Unfortunately, meeting that deadline will not be an easy matter for many companies. We sat down with Brian Sommer, ZDnet columnist and founder of research firm Vital Analysis, to chat about the impact, risks and challenges surrounding the new Revenue Recognition rules and where companies should be in their transition planning.
1) Can you explain how the new Rev Rec rules will affect companies? What types of businesses will be most heavily impacted?
Businesses that have multiple components (e.g., product, services, warranties, etc.) in a single contract are the most impacted. If your firm permits changes to active contracts (e.g., adding that sports package to your cable TV contract), they are impacted. If the timing of when your firm pays commissions differs from when the products and services are actually delivered, then your firm is impacted. Cellular phone companies, software firms and many other kinds of companies will be impacted – some far more so than others.
2) What are some of the key challenges that finance leaders may face while transitioning to the new standard?
The biggest challenge may simply be time. When I look at the calendar, I see huge blocks of time that are already spoken for with most corporate accounting personnel. In between their monthly/quarterly/annual closes, their interactions and prep work with the external auditors, their tax matters, etc., will they have any time for a major project like new revenue recognition rules? I just don’t see it.
The other big challenge may be in getting access to revenue recognition expertise. Accounting firms are all being pinged by their clients to review preliminary Rev Rec calculations and approaches. But, as the deadline approaches, expect these third party subject matter experts to be hard to secure time with. Likewise, systems integrators may have lots of application software expertise, but, will they have anyone to spare who actually knows the implementation intricacies of new revenue recognition requirements or functionality?
3) What kinds of policy decisions might companies want to rethink because of these new rules? Which groups in a firm get impacted and exactly how so?
The new Revenue Recognition rules will likely cause some firms to rethink:
– How they pay commissions
– Whether they’ll permit mid-contract adjustments
– If they will bundle services, warranties, etc. into a product sale
– If they will allow customers to have long money-back return policies
Why? The accounting for these flexible or bundled deals will now be different. Executives will likely ask questions like these as the cost to administer these options may no longer be cost effective. However, don’t expect salespeople to accept new commission rules without a fight. Likewise for the other sales and operational impacts above.
As with any change, the Accounting team needs get out in front of this and identify how many contracts will be impacted by the new rules and how material that impact will be on all of the affected constituents.
4) With the deadline quickly approaching, how far along should companies be in their preparation/implementation process?
By now, most firms should have decided what the impact will be on ALL of their business units. Detailed reviews of existing contracts should have been completed, assuming of course that all contracts could be located.
Most firms should have already calculated the proposed financial statement effect of these changes and communicated them to the Executive Committee, Audit Committee of the board and, possibly, to external shareholders.
Right now, any systems changes, file/data conversions, etc. should also be underway and getting tested.
5) What are the risks of not being prepared and failing to meet these new requirements?
I’ll let the IRS take this one. Just remember that Sarbanes-Oxley requires top company officers to sign off on the financial statements of publicly traded firms. You can bet no CFO or CEO wants to risk a jail term over non-compliant revenue accounting.
6) Given the urgency to meet the new deadlines, what can Finance Leaders do or say to get support with the transition?
Probably the most impactful thing I see/hear is the timetable for compliance. Show your leadership the schedule of activities your firm will need to complete before the compliance deadline. There’s actually a lot more work involved than many think especially if your firm will need to select and implement new financial or revenue management software. There’s a real critical path of activity and the compliance deadline is not likely to move.
Want to learn how to better manage the remaining time and tasks prior to the new Revenue Recognition deadlines? Download this Transition Guide to the New Rev Rec Standard from Brian Sommer.