Among the numerous compliance and regulatory changes over recent years, ASC 606 on Revenue Recognition has been one of the most significant and challenging for companies to implement.
Since May 2014, when FASB issued Update 2014-09, companies have grappled with the widespread impacts on their revenue accounting and reporting processes. The original implementation dates have been moved out several times, with most public companies having first complied for their 2018 fiscal year. In June 2020 FASB issued Update 2020-05, which pushed out compliance for private companies that have not already complied. The new requirement for them is now for reporting periods beginning after December 15, 2020.
Basically, the ASC 606 standard was designed to harmonize how revenue is handled across all industries, effectively replacing more than 100 different industry-specific and transaction-specific guidelines with a new five-step framework. While in concept this sounds straightforward, the implementation process has presented many challenges.
The full standard is more than 700 pages long including all amendments and it has numerous impacts not only on revenue reporting but also many related issues, such as how companies obtain and satisfy their contracts with customers, how sales related expenses are handled, how sales commissions are expensed or capitalized and amortized, etc. In addition, the ASC 606 changes have caused significant ripple effects throughout overall finance, accounting, forecasting, period closing processes and disclosure reporting arenas.
Even if you are a pubic company that has already implemented basic compliance with ASC 606, there are a number of key issues and questions that you should ask in order to take basic compliance to the next level by optimizing and integrating it into your overall finance processes.
These important questions include:
- Are your month-end and quarter-end closing processes taking longer due to data issues with integrating revenue accounting?
- Are you needing to make frequent manual adjustments to the General Ledger for revenue recognition issues?
- Is your disclosure reporting process longer and more complex because of non-integrated revenue accounting data?
- Do revenue contract modifications, such as updates to subscriber plans or billing changes, take longer than they should to implement and monitor the impacts?
- Are you having to use manual processes to integrate data from non-integrated standalone RevRec platforms into your core ERP system?
Too many companies that used expedient solutions, such as standalone software or worse yet manually compiled spreadsheets, are now running up against the inherent limitations of those approaches.
Ideally, front-line revenue recognition processes should be integrated directly with core ERP systems and associated analytics processes, such that companies have seamless visibility into how changes to contracts, billing methods, subscription plans and other revenue accounting processes impact core business objectives, profitability and investor-facing financial reporting processes.
Some of the key benefits from integrating and optimizing revenue recognition include:
- Leveraging analytics to provide insights into relationships between revenue accounting and profitability, with options for what-if modeling to assess impacts of alternative pricing scenarios
- Enhanced forecasting capabilities, with insights into impacts on margins and cash flows
- Transparent insights into costs and profitability down to the element level including Performance Obligations (POBs)
- Improved visibility into deferred revenue and analysis of changes over time
- Seamless audit trails with supporting data from frontline revenue accounting through financial disclosures and reporting
- Lower costs for revenue accounting resources, staff time, and audit expenses
- Improved efficiency, accuracy, security, and scalability
- Enhanced agility for evaluating and implementing new disruptive business models, such as subscription-based offerings, pricing changes, etc.
Bramasol has been at the center of the action with regard to ASC 606 and IFRS 15 since the start and, as a prime mover and key co-innovator on SAP’s Revenue Accounting and Reporting (RAR) application, we’ve helped pioneer the use of fully integrated RevRec solutions that operate seamlessly with core ERP systems.
Now, with the first wave of implementation completed, we are helping clients assess their next steps and move toward more optimized revenue accounting processes to leverage the benefits listed above.
As part of this forward-looking process, we’ve put together a quick RevRec Health Check self-assessment tool designed to help you evaluate where you are and to inform your forward path toward optimization.
It’s only six questions but it could lead to major improvements in the integration and optimization of your revenue accounting processes and your overall business outcomes.