When it comes to revenue recognition time is not on your side. Although it may seem far away, time to implement these new processes is quickly running out.
CPAs worldwide are living in an era of turbulent change thanks to a series of new standards recently passed by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). The implementation process for many of these changes will overlap, creating a host of regulations that accountants must adhere to. In this three-part series I will cover what these changes mean, how they impact current processes, and provide some advice on steps for becoming compliant.
These turbulent changes mean that a perfect storm of accounting standards is upon us, and the storm begins with IFRS 15. The new five step, principles-based revenue recognition standard (IFRS 15 / ASC 606) is slated to improve comparability across industries, replacing nearly all current revenue recognition requirements under IAS & US GAAP. As a result, IFRS 15 / ASC 606 will change the way private, public and non-profit organizations manage business processes, earnings statements, and internal control over financial reporting.
The effective date for being compliant is January 1, 2018. Although this seems far away, time to implement these new processes is quickly running out. It takes roughly 18 months for the average company to adopt to this new standard, and with only 14 months to go, lead time for companies seeking to do any meaningful dual reporting in advance of adopting the new standard is quickly dwindling away.
As regulatory compliance is non-negotiable, CFOs need to evaluate the challenges that the new regulation poses for both their accounting departments and their enterprises as a whole. A recent study from PWC found that many companies do not yet have a clear understanding of how the new standard will impact their organization. CFOs need to recognize what’s needed for the big shift and develop a plan for how their company will comply. This plan includes investing in professional development to get employees ready for the change and taking the time to understand how revenue and earnings will be affected. Let’s take a look at these three areas in more detail.
Since 2014, colleges and universities have been integrating the new revenue recognition standards into their curriculum, making millennial CPAs knowledgeable of the subject. For experienced accounting professionals, it takes around nine months of active use to get up to speed on the new standard. With deadlines looming, companies simply can’t afford to delay the up skilling process at all. CFOs need to work with their HR department to educate existing staff as quickly as possible. Employees will need guidance on the basic principles and concepts of IFRS 15 / ASC 606 and how to apply them. The IFRS offers training materials for businesses to use in-house and Deloitte has a free training e-module to help get employees up to speed.
With all of the new data and information employees will be sorting through, they will also need up-to-date technology to help streamline the process and manage the sheer volume of data. Companies that plan to adopt tools specifically designed to support revenue recognition may require additional training. Finance departments should also be prepared to partner closely with operations, sales and IT, as the new standard affects many parts of the business process.
IFRS 15 / ASC 606 is based on a five step model that is meant to be transparent and event driven. Companies are obligated to perform certain activities, services, rights, warranties, delivery of goods, money back guarantees, and more in order to recognize revenue. Under the new standard, all of these performance obligations must be transparently recorded, priced and recognized, but only when the appropriate event is completed signifying that the performance obligation has been satisfied and that revenue can be recognized. For example, a money-back guarantee that is promised may not be accounted for under the current standard, but will be tracked, made transparent, and accounted for.
So, the transparency of the revenue will be much more granular in many cases under the new model, (which I shorten as identify, assign, price, allocate, and recognize). Also, applying the new standard could impact the timing of certain revenues.
Broken down more simply – this new standard will result in major changes for CPAs. While the impact on revenue will be unique to each company, industries such as telecommunications could notice a big difference in their final reporting.
A change in revenue recognition standards can impact not only how revenue is calculated and performed, but can also impact the final numbers or earnings. Add in possible changes in the timing of when earnings are announced and how investors and stakeholders are communicated to and you can start to see more of the perfect storm brewing. Most companies want to see the impact on their financial statements before they release them to the public. To do this, companies run in parallel for a period of time, usually six months, to see how the changes will impact their financial statements. These changes will also impact taxes and tax liabilities and should be reviewed carefully for their impact on the bottom line.
The main takeaway when it comes to revenue recognition is that time is not on your side. CFOs and CPAs need to begin preparing for IFRS 15 / ASC 606 now in order to ensure they are ready when the 2018 deadline hits. Finance executives need to take the time to understand how revenue and earnings will be impacted while also helping to ease the transition by properly training their employees.
Thack Brown is General Manager and Global Head of Line-of-Business Finance at SAP.•