Avoid Inertia: Best Practices for Implementing Topic 606

There is a word that accountants fear may be creeping into accounting departments across the country that are facing major changes to revenue recognition, leasing, financial instruments and likely others: Inertia.

Inertia is defined as a tendency to do nothing. It represents the single biggest risk for chaos for preparers and auditors in the next several years.

The genesis of inertia often lies in the difficulty of where to start. It's never too early to get on the offensive and tackle the challenging process of implementing Topic 606, as well as other emerging standards. Reviewing the following ideas may help ignite accounting departments and avoid inertia.

Getting Started

An old Chinese proverb states that a journey of a thousand miles begins with a single step. While the implementation of this standard is no easy undertaking, the hardest part for many businesses will be finding out where to start.

To help with the process, establish a cross-functional team. Representatives from accounting, finance, treasury, legal and human resources should be involved. Find an opportunity to get the appropriate members of the team educated. Having voices in the room with intimate knowledge of the standard is a prerequisite to any meaningful progress.

Once your team is established, conduct a brainstorming session to identify the company's key revenue streams and what they impact (e.g. compensation, debt agreements, etc.). This will be the first step in truly understanding the scope of the implementation and how much effect it may have on your business. Avoid the details, and focus on getting an understanding of your company's potential pain points. Assign a project lead, which doesn't necessarily need to be someone from accounting, who possesses the skills to stick to a timeline and hold team members accountable.

Getting Organized

Come up with a concise, repeatable process for executing documentation; this is especially important if your company is contract-heavy. Once you reach the organization phase you're moving from the high-level to the detailed implementation. Don't underestimate the amount of documentation that will be required to analyze the company's revenue streams and contracts at a detailed level. Even if you think, "It won't impact us," there is only one way to prove it, and that is to walk your contracts or revenue streams through the prescribed five-step method and provide documentation of that analysis.

Getting Your Controls Right

Accounting firms are contemplating the audit implications associated with the adoption of Topic 606, and it is clear from those discussions that the amount of work that is going to be required will be highly dependent on a company's control environment. Ensure that your revenue streams and/or contracts are being evaluated by someone with the appropriate level of technical acumen.

Keep in mind that getting the right answer at a high-level does not always translate into proper application at the contract or transaction level. Companies need to also take a hard look at their processes around contract management, including the degree of standardization, the individuals with credentials to negotiate and sign contracts, detective controls around confirming that terms are in accordance with the company's policies, proper storage and backup of contracts and appropriate monitoring of contract modifications, etc. The contract process usually involves interaction with your legal department, which re-emphasizes the importance of a cross-functional team.

Getting the Big Picture

Topic 606 is not the only significant change to accounting on the horizon. Changes to lease accounting and accounting for financial instruments have already been issued and further changes are anticipated. Therefore, when developing a timeline, don't lose sight of the fact that resources will need to be spread among a variety of significant projects. In addition, Topic 606 and the new leasing standard interact in a number of ways, so it is important to understand those relationships in an effort to apply similar conclusions consistently.

Remember, there's only one way to keep inertia take over your accounting department: Get moving.

For More Information

If you have any specific questions, comments or concerns, please share them with James Comito, Mark Winiarski or Brad Hale of MHM's Professional Standards Group or your MHM service professional. You can reach James at jcomito@cbiz.com or 858.795.2029, Mark at mwiniarski@cbiz.com or 816.945.5614, and Brad at bhale@cbiz.com or 727.572.1400.