- Internal control considerations related to adoption of the new revenue recognition standard
- Preparing for ASC 606
- Control changes with ASC 606 implementation
- What private companies should know about the new revenue recognition standard
Internal control considerations related to adoption of the new revenue recognition standardApril 19 by Sarah Van Caster. Life is great. You have a decent job with a good pension plan. What you do not know is, although Back to the Future and Phil Collins will both stand the test of time, your pension will not. One small accounting rule will change the way the entire country saves for retirement. The new standard requires companies to change how they account for their pension plans, suddenly making pensions far more expensive. Many companies will choose to phase out pensions and introduce defined contribution plans, the most popular of which are k plans. Fast-forward to your retirement plan has shifted to a k plan, which works for you and the movies you see are now controlled strictly by your children. And, another major accounting rule is about to make a splash in the business world. This change is going to have a global impact on public and private companies. Here is what you need to know:. The guidelines are about the results of your end-to-end processes starting with contracts, through pricing, quotes, orders, and ending with revenue recognition. Private companies are not required to use GAAP standards, but as a general practice, many do to adhere to best practices and encourage external investment. ASC is all about revenue recognition, a process which is historically inconsistent across companies and industries. It is variable because it is messy. Recognizing revenue often has many different factors coming into play throughout the lifecycle of the sale — subscription models monthly fees vs. If you are an organization that processes millions of transactions or generates billions of dollars, you can see where these seemingly endless combinations of revenue recognition can get tricky. The bottom line is rules on revenue recognition have not been strong enough, but the accounting gurus have acknowledged this and ASC is the answer to this current financial challenge. US GAAP requires public entities to apply the revenue standard for annual reporting periods including interim periods therein beginning after December 15,and permits early adoption a year earlier that is, for annual periods beginning after December 15, Nonpublic entities reporting under US GAAP are required to apply the revenue standard for annual periods beginning after December 15, Nonpublic entities reporting under US GAAP are permitted to apply the standard early; however, adoption can be no earlier than annual reporting periods beginning after December 15, Entities that report under IFRS are required to apply the revenue standard for annual reporting periods beginning on or after January 1,and early adoption is permitted. For most in finance, ASC will have a direct impact to some daily tasks. Typically, revenue recognition rules were specific to an industry, at least to an extent. With ASCthese rules are now more general. This means finance resources will not need to necessarily have as deep industry knowledge as was once required, but they do need to learn ASC inside and out. Financial resources will also need to spend more time strategizing around contracts and doing this work may require new skills for some. ASC will make revenue recognition calculations more complicated, potentially requiring new systems to help with processing and forecasting. Quote-to-Cash technology will be more important than ever with these new standards. In order to make the right decision, the revenue recognition rules need to be baked-in to the product catalog, up-sell and cross-sell programs, contracts, and other areas of the sales process. Having a Quote-to-Cash solution in place is the best chance at achieving optimal outcomes for the business, while complying with ASC The major ASC change for sales organizations is the need to align sales incentives commissions, bonuses, etc. For many salespeople, this will mean a direct impact to their comp plans — not necessarily positive or negative, but the ways people get incentivized will need to change. Conversely, there may be options that accelerate revenue recognition like offering higher commission payouts for high margin product sales, product bundles that include upfront purchases with subscription services or other programs that bring revenue in faster.
Preparing for ASC 606
Internal control considerations related to adoption of the new revenue recognition standard has been added to Bookmarks. Internal control considerations related to adoption of the new revenue recognition standard has been removed from Bookmarks. An Article Titled Internal control considerations related to adoption of the new revenue recognition standard already exists in Bookmark library. This Heads Up discusses considerations related to a company's internal control over financial reporting in connection with its adoption of the FASB's new standard on revenue recognition. This is a preview of the Heads Up. View the complete Heads Up. SEC filing data show that revenue recognition is one of the most common accounting issues that trigger a material weakness. This Heads Up discusses certain considerations with respect to internal control and the adoption of the new revenue standard. The SEC has been emphasizing the importance of transition-period disclosures or preadoption disclosures in accordance with SAB A company that is able to reasonably estimate the quantitative impact of the new standard should disclose those amounts. Some disclosures may therefore include pro forma financial statements under the full retrospective method. Management should first identify whether appropriate internal controls exist for the disclosures and then specify the information and analysis used to support them. When assessing whether appropriate internal controls exist with respect to the preadoption disclosures, management may consider whether procedures are in place regarding:. There are often unique circumstances and considerations associated with the adoption of a new accounting standard that can pose a higher risk of material misstatement to the financial statements. Management should also consider the internal controls, documentation, and evidence it needs to support:. The new revenue standard requires companies to apply a five-step model for recognizing revenue. As a result of the five steps, it is possible that new financial reporting risks will emerge, including new or modified fraud risks, and that new processes and internal controls will be required. Companies will therefore need to consider these new risks and how to change or modify internal controls to address the new risks. For example, in applying the five-step model, management will need to make significant judgments and estimates e. It is critical for management to 1 evaluate the risks of material misstatement associated with these judgments and estimates, 2 design and implement controls to address those risks, and 3 maintain documentation that supports the assumptions and judgments that underpin its estimates.
That old saying is probably as true for management accountants and other finance professionals as it is for folks in different walks of life. It might resonate even deeper these days as you get ready to roll up your sleeves and face another new set of regulations. Known as ASCRevenue from Contracts with Customersthe standard will improve the financial reporting of revenue and improve comparability of the top line in financial statements globally, the Boards say. Under the new revenue reporting regulations, which would establish a common revenue standard for U. These changes will affect every organization, though to what exact extent will differ on a company-by-company basis. Granted, with the Sarbanes-Oxley Act of SOX and the Dodd-Frank Wall Street Reform and Consumer Protection Act ofthere have been a lot of regulatory changes in the past 10 to 15 years, so a certain amount of organizational fatigue is to be expected. Nevertheless, timely, accurate revenue reporting is critical to compliant operations. If your organization is a vendor, ASC will likely impact you in a number of areas—both inside and outside the accounting department—including contracts with customers plus those with product warranties and returnsbonus plans, expenses, taxes, IT, internal controls, and investor relations. If your company is a customer, you may see changes in how vendors propose contracts or sell products or services to you. Policies and processes will need to be updated, data management will need to be adapted, reporting methods and control will need to be modified, and employees will need to be educated about the changes and how to adhere to the new regulations. Clearly, all of this will involve change at the organizational level. Yet while the changes are spelled out and the steps are established, companies will still need to use their best judgment in implementing the principles-based approach for determining revenue recognition for their own unique structures. Inwhen organizations were required to adapt internal controls to comply with SOX, many companies struggled to implement the necessary changes on time. To a large extent, it was because of a low supply of skilled talent combined with misconceptions about how that talent wanted to work. At the time, it became clear that many employers simply assumed the right people would be available—despite widespread warnings to the contrary. Moreover, the general notion was that companies could bring in external consultants to manage the change. There was also a distinct preference for talent with Big 4 experience since the brand recognition stands for quality, safety, and minimized risk. Unfortunately, though there were many professionals in the Big 4 and other public accounting firms with the necessary expertise pertaining to internal controls, the availability of professionals for the private sector was severely limited—especially because demand suddenly spiked. To complicate matters, many of those who were available were looking for permanent positions. As a result, a huge market developed for permanent finance and accounting talent with internal controls experience. Additionally, the demand for auxiliary talent to fill lower-level positions increased. With numerous organizations competing for talent, many were late to start implementing the necessary changes.
Control changes with ASC 606 implementation
Surveys of middle market business leaders ihowever, indicate that many companies may not be aware of what it takes to implement the changes to systems and procedures brought on by ASC We spoke with Steve Keisling, director of revenue accounting at Imprivataa health care IT security company, and Larry Penta, senior revenue manager at Monotypewhich provides font design assets and technology. Both discussed their experiences leading up to and following their implementation of ASC Their comments provide a glimpse into what private companies can expect as they approach adoption of the standard in Watch the video below or read on to understand the scope involved in adopting the standard. Steve Keisling: We did our initial assessment of the new standard back in Our chief financial officer at the time was concerned that our deferred revenue was going to continue to grow under the current standard and that, the longer we waited to adopt the new standard, the larger the vaporized revenue amount was going to be at the time of ASC adoption. Imprivata didn't want to end up losing that revenue. Larry Penta: We just adopted it as a publicly traded company in January We started considering the approach to the new standard approximately two years prior to adoption. The first year was dedicated to scoping out the revenue streams, understanding the impact of the standard on those revenue streams and in general planning for the implementation of the standard. SK: We did learn a lot as we dug into the new standard, particularly on the commission side. I think we knew what the effects were going to be from a revenue standpoint under ASCbut we didn't fully understand the implications for commissions. LP: We did understand that it would have a material impact on our financial statements and that our current processes and systems would not be sufficient for implementing the standard. This meant that we needed to be sure that we rolled out the implementation with enough room in our timeline to absorb and roll out a new system and new finance processes. Back inour company was purchased by aprivate equity firm and that firm required that all of the companies within its portfolio use the full retrospective. LP: Originally, we actually started planning for the full retrospective approach. But after scoping the entire project we realized that the modified retrospective would still provide investors with enough information to be useful to them. The other thing that we realized is that our business was really complex. We had a large number of revenue streams and, although the expectation was that the financial impact of the new standard would be material, it may not be as significant as we had originally anticipated. The workload included in scoping the system and process changes, SOX controls—and all that—would be absolutely a massive undertaking. So, in order to reduce the timing risk—and since missing the adoption day was not an option—we had to take the path to give us the best chance of success, and that was the modified retrospective. SK : In the beginning of the process, we decide to work on the project entirely in-house. But once we started to dig in and understand the amount of work and resources that it was going to take in order to meet our internal deadline of adopting by Jan. We figured it was going to probably take at least six to twelve months in order to be ready to go live as of Jan. It ended up being less with RSM assisting us with the implementation. LP: What we realized pretty early on is that the updates to our information systems, SAP in particular, were going to be a significant undertaking and we knew we didn't have the resources to do that in-house. We needed assistance from external folks, which ended up being RSM, among others. SK: Most of our time was spent on the system side. We currently use NetSuite as our accounting system and, underwe had to implement Multi-Book. A lot of time was spent in getting that book up and running because, under Multi-Book, you have to take your primary book and copy it over into the ASC book.