8 Lessons learned from public companies for implementing ASC 606
Revenue recognition has always been one of the more challenging parts of GAAP. FASB’s latest update, ASC 606, is a big shift from an industry-specific and rules-based approach to a unified principles-based approach, as I wrote about in this article on the new recognition standard. Public companies have been implementing this for periods beginning after Dec. 15, 2017, but private companies got an extra year, and should be actively working on implementing it now. This means that private companies and their advisors can take advantage of the lessons learned by public companies.
Start now if you haven’t already
Public companies and early adopters discovered that implementation takes longer than expected. The first step is simply gathering the most current versions of all contracts and agreements, and analyzing them. This may take quite a bit of effort, depending on an organization’s business model and size. Waiting too long may mean that expensive consultants may need to be brought in. Smaller companies will need help from their advisors.
It takes a team approach
Because this standard impacts many aspects of businesses, larger companies may need to create a team from different parts of their organizations. Legal, procurement, sales, and operations will need education to understand how contract terms impact the financials.
Your clients may need extra help
Advisors may need to be proactive in encouraging clients to start the process early to avoid your own time-crunch in the last quarter of the year. Check in with your clients regularly to make sure they’re on schedule.
The new standard requires more judgment, so it’s a good idea to work closely with your clients to make sure you’re in agreement with their estimates. They may also need help with the new voluminous disclosures.
Be ready for a steep learning curve
Organizations and their advisors will need time to understand the new approach and how to implement it. Deloitte just put out a nice guide for private companies, and RSM has a detailed overview. Additional resources include webinars and guidance from FASB and the AICPA. Another great source of practical guidance might be the most recent financials of public companies, especially if you can find some in your clients’ industries.
Additional resources required
Companies are finding that they need additional expertise to get it right. This may mean investing in training someone within the company to be the resident expert, or it may mean hiring outside help. Either way, this will take additional resources.
The additional training and work needed for implementation means that already busy finance teams will have less time to get their regular work done. They may have to work longer hours. Hiring additional help or financial incentives may be needed to get over the hump.
An opportunity for business improvement
Aggregating an organization’s contracts is an opportunity to look for ways to improve business processes, especially around contracts. Are there standard contract terms, or is each contract a one-off exercise? Can contracts be simplified or standardized? Are there ways to keep deferrals reasonable?
Pulling apart contracts to separate them into their components can give companies a new way to look at pricing strategies. Are the prices charged commensurate with the value provided? Processes around contract negotiation may also change to reflect the new standard.
Implementing the new standard will also likely require changes to a company’s accounting processes, so this may be a good opportunity to search for efficiencies wherever possible. Keep in mind that after climbing the mountain to implementation, any new processes for revenue recognition need to work for the long haul.
What tech is on deck?
Companies with many contracts, and especially software-as-a-service businesses, will most likely need a software solution to help manage complex streams of revenue. Unfortunately, as Jim Kroeker, FASB board member and vice chairman, discusses in this Journal of Accountancy podcast, technology options for companies that are not using an ERP are still limited, so there may be a few bumpy years ahead.
Tune up internal controls
Internal controls need to be evaluated from the very basic of ensuring that the most current copies of contracts, and agreements are available to making sure that the right people have the authorization for contract approvals and modifications. How are estimates being made and evaluated? How are changes to contract terms being integrated into those estimates?
Taking an active role and helping your clients implement this standard may not be for everyone. Partnering with another advisor might be the right choice for you. But, for those who choose to dive in and become ASC 606 experts, it’s a sure way to save the day for your clients!