Accounting

If You’re Behind on Rev Rec Standards, It’s Time for Brute Force

Given the fast-approaching deadline for adoption, those who have chosen to implement an automated revenue management system may be facing an interim manual “brute force” approach as the only option.

Time is running out. The effective date for the FASB and IASB’s new revenue recognition accounting standards (ASC 606 and IFRS 15) is just a few months away: January 1, 2018 for most public companies. The new standard will impact many organizations– for some, the impact may be manageable but it may be overwhelming for others. Given the fast-approaching deadline for adoption, those who have chosen to implement an automated revenue management system (along with the necessary supporting business processes) may be facing an interim manual “brute force” approach as the only option.

Time and Options are Running Out

Organizations are all at different stages of “readiness”: some are on track to complete final preparations, some of them are in the middle of this complex implementation and others are still assessing the impact, three months out from the effective date. How a company approaches its remaining implementation activities depends on the company’s effective date, the chosen transition method, availability and quality of data, and the degree of accounting impacts, which can have a multiplier effect on the company’s processes, technology, and controls. With most public companies having just one more quarter to comply, implementation options are limited.

An end-to-end automated revenue management system for ASC 606 or IFRS 15 typically requires more than 12 months to implement. This is particularly true for companies with multi-location operations, multiple element arrangements, or contracts where the scope and considerations are likely to change over the contract life.

Companies pursuing revenue automation should be well into the implementation process. The limited time remaining until adoption is even causing some companies that have started down the path of an automated revenue management system to evaluate the need for a backup plan, in the event that an automated solution is not implemented in time or if the solution cannot address all of the business requirements.

Companies that cannot effectively implement an automated revenue system in the time remaining should consider a “brute force” manual approach to reach compliance by the deadline. An accelerated manual approach is likely a combination of human-managed processes and enabling technology and tools, such as spreadsheets or a tactical database solution (e.g. MS SQL Server) that supplement existing systems and processes to achieve near-term compliance. While there is an increased risk in a “brute force” approach because of its nature, some companies may find no other feasible solution in the short term.

As companies go down this path, a few important considerations should help ease both the implementation and the ultimate transition to a more permanent solution.

Don’t Underestimate the Complexity and the Associated Risks

Because of a manual approach’s higher level of risk and resource intensive process it shouldn’t be considered a replacement for a sustainable long-term solution, but rather an interim approach or a necessary complement to it.

Even a “brute force” solution has many complex elements, including navigating accounting, operational, and data complexities as well as the management of resource constraints and competing priorities in a condensed timeline. Revenue recognition is a critical and often complex accounting area that companies can’t afford to get wrong. Capitalizing the costs to obtain a contract (i.e., commissions), calculating stand-alone selling prices, and estimating variable consideration are complex areas affected by the new revenue recognition model, to name just a few. Furthermore, depending on the adoption method, it may take significant effort to quantify the impacts of the new standard to retrospective periods and calculate the opening balance sheet adjustments. Not to mention, that if a company is taking the modified retrospective approach, it will also have to plan for reporting results under both the new revenue standard as well as historical revenue recognition guidance each quarter in the year of adoption, which will further strain any existing resource constraints.

Data, too, can add complexity. The new revenue recognition model touches many aspects of the quote to cash process, and involves gathering the required data across that process to meet the new standards’ requirements. Many companies are finding data availability, data quality and controls around source data to be areas requiring significant attention as part of the implementation process. The gathering of data required for preparation of financial statements in accordance with the new standards can be a time consuming task, because in some cases, historical data may not be readily available due to changes in enterprise resource planning, historical operational processes, or mergers and acquisitions.

It’s also important to understand and plan for the resource requirements throughout implementation and post implementation until a sustainable steady state can be reached. With the scarcity of talent in the marketplace and the need to incorporate other regulatory changes coming in the short-term (such as the new lease accounting standard taking effect in 2019), effective resource planning and management are paramount to success.

A key advantage of a centralized, automated approach is tight control. When implementing a manual approach, leaders need to also implement strategic controls into the work stream. This layer of risk management cannot be treated as an afterthought, even if the solution is seen as temporary.

Design for Future Sustainability

Companies can devise a structure that will assist in progressing to a more permanent automated solution even while implementing a partially manual approach. In other words, take on a “brute force” approach while thinking through a plan that addresses compliance in a more sustainable manner. The potential synergies between an interim manual solution and automated revenue management systems include identifying and prioritizing processing capabilities, transaction scoping, and assessing existing data.

Make the Most of the Time Left

Those companies facing a 2018 compliance date cannot afford to delay any further. Companies facing a 2019 compliance date may still have time to pursue automated revenue management solutions if they begin assessment now. For many reasons, getting outside specialist help can increase the likelihood of building a compliant solution in the short-term and a sustainable one over time. This is the transformational level of change that involves changes to processes, controls, systems, and data. And it’s a change that requires (1) technology and industry expertise and (2) an accounting mindset – a combination that can be hard to source internally. Finally, experienced resources can help in the avoidance of missteps, because there is little time to remedy for those.

The Final Countdown: Organizing Human Resources as an Actionable First Step

In addition to managing team members who interact with these regulations daily, the audit function needs to be heavily involved in this process to ensure all procedures are adjusted appropriately. Given the amount of change required, external auditors and audit committees should be involved early and often with the overall adoption change approach – especially when manual efforts are being used. It is vital to demonstrate to external auditors that there are adequate controls around manual processes and that these controls (including spreadsheet controls) are designed and operating effectively. This will greatly impact the extent of substantive work needed as part of the audit process. Managing internal and external forces to implement a “brute force” solution ensures this short-term answer operates effectively and brings the organization up to code – just in the nick of time.

Shane Foley is a Partner at PwC – Risk Assurance GAAP Change Leader.