Could a different perspective on revenue recognition reveal new business insights?
Find out how EY is helping companies rethink accounting change and gain an entirely new perspective on growth.
Companies have been hearing about the new revenue recognition standard for years, and as the effective date approaches, they are evaluating the state of their implementation efforts. All companies were relieved when the effective date was deferred to 2018 for calendar-year public entities, but now they are ensuring they have the ability to get things under control in a limited amount of time.
A great deal is on the line, since the new standard could affect investor perceptions of company performance. But also at stake is a chance to seize value from required change by translating compliance into operational improvements.
Now is the time to focus sharply on continuing to prepare for the new revenue recognition standard. The truth is that the difference between complying on time and falling behind is going to be razor thin for some organizations.
Consider these 5 revenue recognition reality tests:
First, the finance function is not the only part of a company that needs to be involved in the transition. Indeed, for some organizations, just about every function will have a role. IT, of course, will be heavily involved, especially if its systems that relate to revenue recognition haven’t been upgraded in a while. Various business units and geographies could be part of the planning. And additional resources, both external and internal, may be needed. Is everyone onboard?
Second, implementation plans will need to incorporate which transition method a company plans to take – modified or full retrospective. A modified retrospective approach requires the standard to be applied only to the most current period presented in the financial statements, or 2018 for a calendar yearend public entity (if the company chooses not to “early adopt” the standard).
But if a full retrospective approach is taken, a public company needs to present two years of comparative financial information under the new standard in its 2018 financial statements. Many investors may prefer a full retrospective approach, to get better trend information. But even if the modified retrospective approach is taken, investors will likely want to see some level of comparability to analyze trends. Has a decision been made?
Third, the change for some companies is going to be very expensive, with some organizations estimating multimillion dollar implementations. Has a budget been set at your company, not just for the finance function, but for IT and other departments? Has the cost been estimated?
Fourth, the new standard is complex, creating a five-step model for recognizing revenue:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the price to the obligations
- Recognize revenue when (or as) each obligation is satisfied
These steps call for significant judgment at almost every turn and new levels of explanation and disclosure. Have revenue streams and underlying contracts been queued up for review in this new environment?
As daunting as all this sounds, revenue recognition is not the only major change coming down the pike — new guidance on leasing, also very complicated, will become effective just a year later than this standard, resulting in overlapping implementation. Together, the two standards will amount to a revolution in accounting change. And other shifts are in the works as well, including simplification disclosure effectiveness and financial instruments.
Seeing Accounting Change as an opportunity
But the good news is that amidst all this change, there may be opportunities. In the case of revenue recognition, a thoughtful implementation may produce new efficiencies, enhanced systems, processes and controls, and more robust order to cash automation. The benefits could improve a company’s business and not just transform its accounting.
Where to start?
Because the change affects each industry, and every organization, in different ways, it is critically important to do a diagnostic, to understand where a company is, where it needs to be and when it needs to get there. Our diagnostic will point the way on this transformative journey. After identifying the standard’s specific impact on a company, we can help you pick a transition path.
We can work with senior management to design a solution and then to help develop and implement it. We have a suite of integrated enabling technology tools that provide help along every step of the way toward compliance — and even beyond, to assist with long-term management.
The goal is to put in place a solution that is on target, on time and on budget — and one that has the potential to unlock new opportunities.