Calendar year-end public companies were required to adopt Revenue from Contracts with Customers (Topic 606) January 1, 2018, and the majority of them spent a significant amount of time and resources in assessing the guidance. Private companies are starting, or continuing, their assessments of the impact in order to adopt the new standard for their annual reporting periods beginning after December 15, 2018.
Below, we discuss recommendations and lessons from those companies that have already adopted the new revenue recognition guidance.
Project Planning and Scoping
A transformational change such as ASC Topic 606 can involve many contributors including finance, accounting, product management, marketing and customer care teams. Without a clear plan and path to implementation, an entity could be faced with inefficiencies and indecision, and procrastination could result in unnecessary pressure on teams as well as risk to financial integrity. Management should therefore identify contributors and decision makers early on, and help them understand their roles and responsibilities, including the scope of work that will be completed.
Project participants will not initially understand the guidance or drudgery it could take to assess and implement the new guidance. Management will therefore need to ensure all affected parties receive appropriate training on ASC Topic 606, including access to the tools the entity plans on using to assess and implement the new standard. Considering that ASC Topic 606 includes various new terms and definitions, management should encourage contributors to use consistent language and definitions. These new terms and definitions will also need to be implemented in the revenue operating cycle, process documents and financial statement disclosures.
Lastly, it is recommended that entities document their plan, decisions, requirements and deliverables, and continuously track progress to ensure there is accountability and a consistent understanding by all parties involved. To expedite the review and decision making process, management should consider implementing a predefined governance model to make quick decisions and remove roadblocks.
Resources and Time
Inevitably, this project will require dedication of resources in the form of people, time and money. While proper planning and project management will improve efficiency, management will need to identify individuals with availability to support the effort. In many instances, workload will need to be reallocated or an external consultant could be brought in to sustain progress.
If management decides to keep the effort in-house, the responsible parties will need to develop a solid understanding of ASC Topic 606 and set aside time to support the project. Conversely, if management decides to rely on an external consultant, careful consideration should be applied to ensure the consultants have a detailed understanding of the scope of their involvement, as well as an adequate skillset and capacity to satisfy their responsibilities. Management should also consider the external consultant's fees — depending on the complexity of revenues and scope of assistance needed from the consultant, the fees associated with the project could be significant.
Considering the large number of calendar-based private companies, the availability of quality external resources will soon start to dwindle.
Lastly, in circumstances where revenue stems from a high volume of systemic transactions, management may need to set aside resources to develop reporting to extract transaction data from applications to address reporting needs during the assessment phase as well as after implementation, such as managing year-over-year changes in revenue recognized as well as forecasting of future revenues.
Internal Processes and Controls
An often overlooked area for consideration is identifying new key controls and updating processes to support not only the assessment but also implementation and accounting for revenue under ASC Topic 606, once adopted.
We have observed a best practice as identifying a new set of key controls to specifically support the assessment and adoption effort. Any impacts with respect to the subsequent accounting of revenue will need to be supported through either updating of existing controls or the addition of new key controls where needed. In addition, entities will need to consider how existing control language should be updated to accurately reflect new terminology and definitions, as well as the five-step process of recognizing revenue.
If applicable, entities should prioritize implementing accounting changes systemically, rather than through manual top-level accounting entries. Tracking activity manually in high-volume situations will be cumbersome and could expose the entity to unwanted accounting risk.
Financial Statement Presentation and Disclosures
The intention of the new standard is for financial statements to provide sufficient and effective information that users of the financial statements would find beneficial, including from an investor's perspective. Considering the rather meager disclosures that have been required under accounting guidance that preceded ASC Topic 606, the more robust disclosures required under the new standard will affect the majority of entities.
While management should ensure the new quantitative disclosure requirements of the new standard are met, it would also require disclosures that explain judgments and are more consistent with how the chief operating decision makers in management discuss and analyze revenue, in order to address the new qualitative requirements of the standard.
External Parties and Compliance
Entities should consider third parties that will be involved in or relying on management's implementation of ASC Topic 606, or other external compliance related issues, including:
- External auditors for financial statement attest engagements.
- Tax preparers and impacts to income tax planning, including deferred taxes.
- Global reporting implications with respect to statutory reporting in foreign countries, conversion to IFRS and transfer pricing policies.
- Debt covenants, incentive compensations, and other agreed-upon revenue-based performance measures.
Management should plan to keep affected parties informed as needed throughout the assessment and implementation process to ensure everyone is aware of and understand potential impacts. External auditors should be involved in initial scoping and planning discussions, as well as be informed of significant management judgments. Continuous alignment will support a more efficient outcome for everyone involved.
ASC Topic 606 is far-reaching and adoption could significantly impact the timing of recognizing revenue from contracts with customers, but not necessarily. Management should caution to not let the possibility of an insignificant accounting impact result in underestimating the effort it could take to assess and adopt ASC Topic 606. Even though there may not be a significant accounting impact from the adoption, there are other significant factors that justify addressing the assessment early and proactively. The earlier companies start the process the easier it will be to find resources to assist in the adoption and the better they can prepare stakeholders for changes that may result in the financial statements.
For More Information
If you have any specific questions, comments or concerns, please share them with Pieter Combrink at firstname.lastname@example.org or 858.232.8681 or Mark Winiarski at email@example.com or 816.945.5614 of MHM's Professional Standards Group, or your MHM service professional.
Published on June 19, 2018