By now it’s evident that the revenue recognition update is a behemoth change that shouldn’t be taken lightly by any organization that will need to comply with it – which, by the way, is the majority. It’s been a long time coming and is arguably one of the most talked about financial reporting issues of the last decade.
And yet, in a recent survey of 100 American tech company CFOs, more than half have not even begun to familiarize themselves with the changes the new rev rec standard will bring. A mere 20% said they were ready to implement the standard, with 57% still analyzing the impact implementation will have on the organization.
The recent deferral of when the standard will take effect may possibly lull companies into a false sense of security that they have tons of time to comply. But taking early steps to prepare for implementation in the short term will be essential to compliance with the new standard in the long term. This way, companies can avoid a mad dash come December 2017 and reduce the risk for comment letters or restatements surrounding the new revenue recognition rules.
Here are five simple tips and tricks for preparing and beginning your transition:
- Prep Early, Prep Often
There’s no question the standard may continue to evolve during the deferral period, which could pose some challenges to early adopters. But as one expert asserts in this CFO.com article, “Companies can take specific steps now to prepare by analyzing current revenue streams and understanding where there are potential differences between current practice and the new standard.”
Another great article outlines additional preparation you can do. Here’s a summary of the key steps the authors prescribe:
- Review existing contracts in the context of the new five-step approach to revenue recognition and watch for features or terms that may require additional attention to transition.
- Assess your company’s ability to actually access the data necessary to comply with the new standard. It’s also important that this is done bearing in mind the processes and systems you use to perform such activities – it’s possible they may need to be adjusted or updated to achieve full compliance.
- Ensure your company has reliable access to the types of information about customer contracts and revenue that are required under the new guidance.
- Keep It On the Record
As you move through the transition, it’s important to accurately record any decisions you make around your organization’s unique path to implementation and how you will handle the new standard. This will make it much easier later, when you may face questions from auditors or regulators.
When it comes to technical projects like this, there really is no such thing as keeping records that are too robust! Assign this task to the most detail-oriented person on your team so that you can rest easy knowing your transition process and strategy is well documented.
- Say it Simply
Even in the early days of transitioning, steer clear of using industry-specific interpretations. Given that the purpose of the standard is to eliminate such differences, you’re not doing your company – or the users of its financial statements for that matter – any favors by continuing to employ accounting that’s specific to your industry.
Several assertions were made on this topic at a recent panel event on revenue recognition implementation hosted by Financial Executives International, which were summarized on FEI Daily. According to the article, Shelly C. Luisi, senior associate chief accountant in the U.S. Securities and Exchange Commission’s Office of the Chief Accountant mentioned that:
“…The SEC is promoting a practical approach to adopting the new standard. As more people delve into the standard’s details, for instance, there is potential for differing interpretations of nuances that, if taken too far, could detract from the standard’s overall objectives.”
It’s important that companies remain cognizant of this risk to avoid getting mired in such details. If you’re facing any confusion about how to treat items that were previously very industry-specific or that leave room for interpretation, check out the FASB’s Transition Resource Group (TRG) to find out the best way to handle it under the new guidance.
- Seize the Opportunity
While some view implementing the new ASU as a very expensive and difficult rule change that they’ll reluctantly face at the last minute, others take a more ‘glass half full’ approach. As far as Steve Hobbs, managing director of Protiviti’s Public Company Transformation practice is concerned, this transition is the perfect chance to reevaluate everything from pricing strategies to products. In other words, don’t just view the transition as a burden, but as an opportunity to better the business in other ways across the board.
“The impact of the rule change is at a much larger scaled [sic] than many people assume, especially when they realize it has cross-functional applications. The devil is in the details, and it’s much more significant than a financial reporting exercise. The deferral offers a chance to capture that opportunity.”
He goes on to list additional things like automating the expensive task of manually capturing revenue data and conducting an overhaul on the existing contract layout and process with any new customers. As you prepare for the rev rec implementation, take some time to identify opportunities for other changes across the business. It may take some extra attention, but if it’s for the greater good on a larger business scale, why not go above and beyond?
- Do As They Say AND as They Do
During the transition, it’s also very important to keep a look out for early adopters filing statements under the new standard. Viewing these early filings will allow you to see how other companies are handling the revenue recognition update, presenting an opportunity for your company to learn from them as you make the transition.
You can get access to these early filings as well as a full-text searchable copy of the ASU itself right in DisclosureNet. Here you will gain immediate access to any updates to the standard itself, as well as automatic alerts on sample filings as they become available. This will be a helpful resource during your busy transition period: You won’t find yourself spending time manually searching for filings issued under the new guidance or having to comb through pages and pages to find precedent examples of the new standard. To make your life easier, DisclosureNet’s search filters, keyword search and copy/paste features mean that you can quickly and easily find these sample filings to borrow and adjust language where needed for your own filings.
Contact us today to learn more.
And there you have it: The long, winding and complicated story of the new revenue recognition standard all packaged up and tied with a neat, concise bow. As the saga continues, make sure you tune back into The Insight Forum regularly to check out our latest reports and views on this and other financial reporting hot-button issues!