Many companies are just starting to assess what impact the new revenue recognition standard, taking effect 1st January, 2018, could have on their organizations.
Although most companies might had a general understanding of key concepts early on, many are just beginning to gain an appreciation for how complex a complete implementation effort can be. Specifically, a complete effort generally includes documentation supporting the review of a large number of contracts, a detailed position paper on how the standard will be applied, an assessment of required processes changes, policies and procedures amendments, additional control procedures and system changes to comply with the new accounting treatments and disclosure requirements.
Under this standard, there are five steps for recognizing revenue within all industries: identifying a contract with a customer; identifying performance obligations; determining transaction price; allocating that transaction price; and recognizing that revenue obligations are satisfied.
While this seems straightforward, the complexities lie within several hundred pages of the standard and application guidance, interpretations and insights provided by the big 4 accounting firms.
There are some lessons learned in the past 18 months working with a diverse group of companies in assessing the impact of revenue recognition and implementing measures to comply with the standard and guidelines:
1. The sooner you prepare the better. Once companies have completed their assessments they should have a good idea how the new standards will affect them. Those that haven’t completed the assessment will be scrambling to figure out what they need to do to get ready.
2. A comprehensive assessment is crucial. While most companies understand the new guidance at a high level, they are often surprised by the contract term nuances and other details they need to address. The application guidance can be very specific and minor changes in contract terms can have a significant impact on how the guidance is applied.
3. Implementation can be challenging. It’s important to know how complex your company’s situation is, what you have to do and what kind of help you need. Companies with a lot of contracts will generally require more implementation efforts than those with a handful of similar contracts with large customers. Companies with varied contract terms will generally have more complicated implementations than those that use standardized contract templates. Companies that offer multiple products and services will also have added complexity. For example, Telecommunication industry is expected to have significant impact on their revenue recognition policies. Also, if a company provides support, installation and engineering, in addition to product sales, each service needs to be assessed individually under the new guidance.
4. Upper management involvement is critical. The best implementations are supported by the board of directors, or a senior level executive who can make preparations a priority for accounting, legal, financial reporting, IT, business development and other business teams. Senior management can also make strategic accounting elections and implement processes and procedures that anticipate the future direction of the company.
5. Auditors need detailed documentation. The more robust the process, the more comfortable an auditor will be that it was done correctly. Companies should be able to articulate positions, explain any expediencies elected and be able to reference accounting guidance considered.
There’s still time
Companies who haven’t assessed the impact of revenue recognition yet should start working with a qualified firm or professional immediately. Those who have, should consider having an outside service provider review their positions to make sure they haven’t missed anything.
The amount of planning can have a huge impact on the business. For instance, companies scrambling to comply tend to create a lot of manual processes to calculate adjustments. It’s best to streamline processes and establish efficiencies in the ERP system on the front end instead of trying to catch up later. We can help design processes and build supporting system requirements so organizations can continue to comply with the guidance after the initial implementation is completed.
Implementation would not end in December. We can continue working with companies to prepare first quarter financial statements, make sure information is properly validated, draft first disclosures, and ensure businesses are capturing all the revenue information necessary to maintain investor confidence.
For more information on the new 2018 revenue recognition standard, or to request an interview with XB4 Technical Accounting specialist, please contact us at + 971(0)4-346-2233.