Improved technology for financial systems will be a critical part of Corporate America’s move to the new revenue recognition standard hurtling toward your income statement by 2018.
That does not, however, mean that improved technology will be part of your implementation plan today. Vendors are still scrambling to deliver updated software that can accommodate that brave new world of revenue, and financial compliance executives must somehow push implementation plans forward right now anyway.
Technology considerations around the new standard are significant. Indeed, fears accounting technology isn’t yet up to the task are one reason why the Financial Accounting Standards Board is poised to approve a one-year delay in the standard’s 2017 effective date. The problem is one of cart versus horse: Software vendors are eager to update their products in principle, but hesitate to embrace that move fully until FASB issues more follow-up guidance expected later in 2015.
“It’s fairly obvious there are no broad-based computerized solutions that are available right now,” FASB member Larry Smith said at a board meeting in April to discuss the one-year delay. “And we don’t expect vendors will complete or even start to complete their packages until we finalize the standard sometime later this year.”
Steve Thompson, a partner with KPMG focused on the new revenue standard, says it’s “no secret” that technology solution providers are taking longer than expected to get products to market. “The standard is continuing to change,” he says.
FASB has issued a proposal to clarify the guidance around licensing arrangements and identifying performance obligations, and another proposal is still pending regarding additional issues such as recognizing revenue gross or net of amounts paid to others in a transaction. “That’s the other side of the coin,” Thompson says. “It’s not as if the standard came out a year ago and has just stayed the same the whole time.”
Software vendors are not necessarily waiting for the final version of the standard to begin rolling out products, says Don Sobczak, managing director at KPMG. “Vendors are trying to align with all the different changes in the standards,” he says. “They’re all at a point where they’ve built some functionality that they know isn’t changing.”
Large vendors of enterprise risk planning systems, for example, are building solutions that are specific to their applications, Sobczak says. “They are available to test and run,” he says. Those providers have left some flexibility in their applications so the software will work across all modules and all versions, assuring they are sustainable if further changes in the standard are still to come, he says.
“I’m concerned some companies are dragging their feet. Some don’t want to get started before they know they have a technology solution. I’m afraid some are delaying maybe a little too much.”
Doug Reynolds, Partner, Grant Thornton
Other specialty vendors are working on bolt-on solutions that offer even more flexibility, but require plenty of input from Corporate America as companies decide on various accounting policies and judgments necessary to comply with the new standard. “They have a lot of building rules,” Thompson says. “If this, then do this. If that, then do that, to cover all the different possible revenue arrangements. When we hear in the market that bolt-on solutions are ready, that means the tools are flexible. Companies build their own rules, effectively.”
Pete Graham, director of finance solutions and mobility at SAP, says the company has been working on transitioning its technology to the requirements of the new standard since 2010. Companies relying on SAP technology began seeing the first versions of new products in late March, he says. SAP tried to develop the solution in a way that enabled flexibility rather than constant updates. “We knew going in we were not playing on a concrete surface,” he says. “These regulations change all the time.”
Still, updates will come, Graham says. “The first version covers core steps in the regulation,” he says. “New features are coming that will assure full coverage on all the nuances of the regulation. We’re not expecting any changes from the accounting boards that will force major rewrites, but if it happens, we will deal with it.”
ARE YOU PREPARED FOR REV-REC?
Below, Softrax outlines what’s in store for companies when the new revenue recognition rule goes into effect.
The new revenue recognition standards issued by FASB and the IASB represent the most significant accounting change for US businesses since Sarbanes-Oxley. Public companies are expected to be ready to comply with the new regulations by the end of 2017, and private companies must start using them by December 2018. That means it's more critical than ever to understand how the new rules will affect the way you report your revenue—and how they change your financial risk reporting profile.
What's Changing in FASB ASC 606 and IFRS 15?
Under the new guidance, old, industry-specific guidelines for revenue recognition are replaced with a 5-step procedure:
Identify the contract with the customer
Identify the performance obligations in the contract
Determine the overall transaction price for the contract
Allocate the transaction price to the performance obligations
Recognize revenue when performance obligations are satisfied
While this streamlines and consolidates revenue recognition as a whole, companies and their auditors must now determine how this framework applies to their existing business processes, and how to handle this transition before the required adoption dates. As a result, even industries whose requirements were relatively simple until now will have to pay close attention to their revenue recognition processes.
Who's Affected by the New Revenue Guidelines?
All industries will be affected to some degree by the new guidance. Companies must also be prepared to disclose more information on customer contracts and the assets involved in them than before, and be ready to consider the requirements of dual reporting and variable consideration.
What Are the Transition Options?
Companies have two ways to handle the transition to ASC 606/ASU 2014-09:
Retrospective adjustment: Use prior revenue recognition rules in the period leading up to the changeover, then provide updated financials for that time period using the new guidelines in the 2018/2019 financial statements.
Cumulative effect adjustment: Use prior revenue recognition rules in the period leading up to the changeover. In doing so, disclose how each line item will be affected by the new guidance, and explain any significant changes created by applying the new versus the prior guidance.
To avoid complications, experts like Grant Thornton have recommended that companies use the cumulative effect adjustment method in their financials.
SAP worked with roughly 30 customers to understand how to meet both the technical requirements and the business needs—and Graham says, SAP is trying to implement a tech solution for the new revenue standard just like anyone else. “We’re using the solution in one of our divisions,” he says. “We’re going to have to go through the regulations and adapt to them too, so we’re the first customer.”
Geoff Harkness, managing director at consulting firm MorganFranklin, says most vendors have gotten to a baseline of determining what they must do to satisfy the needs of different industry sectors. “Most bigger vendors have turned to strategic system integration and consulting partners to build that interim solution,” he says. “They have packaged something that’s one part workaround, one part solution, so people can meet the dual reporting requirement.”
Joe Howell, executive vice president at Workiva, a cloud-based business reporting platform, says his company is not developing any software specific to the new revenue standard, but is gearing up to help with data gathering that will be necessary under the new standard. He sees companies planning to use manual processes, which leads to the need for tight controls. “There’s still a great deal of research to be done,” he says.
Whatever the state of technology development, none of that means companies should wait for a rush of new products to hit the market before they take action to adopt the new standard, warns Doug Reynolds, a partner with Grant Thornton. “I’m concerned some companies are dragging their feet,” he says. “Some don’t want to get started before they know they have a technology solution. I’m afraid some are delaying maybe a little too much.”
Harkness says the technology has “a lot of room to mature,” but companies still have plenty to do in the meantime. “There is still a huge number of people whose cocktail napkin analysis has yielded answers they don’t think are so compelling that they have to move until now,” he says. “They’ve delayed doing the detailed contract analysis.” (The new revenue standard will define transactions as a series of performance obligations, where revenue is recognized once each specific obligation is fulfilled; hence, contract analysis is about to become a much bigger part of the accounting department’s life.)
Thompson says there’s plenty for companies to do before they are ready to leverage any new technology. “We’re working with a lot of companies on assessment,” he says. “It’s not just about the accounting, but what data elements you need to capture and where they come from. Until you fully define all of those, you’re not in a position to complete an implementation.”
Lorraine Malonza, director at Financial Executives International, says her anecdotal observations suggest the same. “Technology is an issue, but it is not the primary issue,” she says. “Some companies haven’t even gotten to the point where they understand how the technology will impact them.”