Five reasons companies should tackle this key task now
It's time to begin the transition to the new revenue recognition standard
It is not often that a new accounting standard has such a broad and global impact.
The new revenue recognition standard could significantly impact the way businesses – in Colorado and around the world — handle revenue reporting and how investors view your business. Our recent experience shows that many companies are behind in their implementation of the new standard, not just here in Colorado but across the country and the world.
Why is it important?
The Financial Accounting Standards Board has adopted a new accounting standard for revenue recognition that replaces a complex web of more than 100 existing sources of revenue recognition guidance. The new standard has the potential for improving the financial reporting landscape in several key ways:
- It substantially converges U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards
- It is more principles-based, which in some circumstances may result in revenue recognition patterns that better reflect the underlying economics
- It expands the disclosure requirements for one of the most important lines in financial statements
Why implement it now?
The new revenue standard is effective Jan.1, 2018 for public companies with a Dec. 31 year-end, or one year later for nonpublic companies. So now is the time for Colorado businesses to start the process of transitioning to the new revenue recognition standard.
Adoption of the rules is not optional
While complying with these standards may seem daunting, adoption of the new rules is not an option.
Companies that fail to implement the standard will find that:
- Their financial statements will no longer be in accordance with GAAP
- They will not be able to get a clean audit opinion
- If they are a public company, they will not be able to comply with SEC requirements
In addition to expanded disclosures and changes in the timing and pattern of revenue recognition, many companies will be faced with changes to their processes, systems and internal controls. The various departments affected – including accounting, finance, tax, IT and investor relations — will need to work together to develop a coordinated response to the new standard.
Key reasons for starting now
Following are five key reasons why companies should begin work on this important task as soon as possible.
You may face unexpected impacts on your accounting
Every company will be impacted by the new rules. And for many companies, unanticipated changes may be lurking below the surface. Some of these changes may not impact the timing of revenue recognition, but they may still require changes to policies, process, and controls. The primary goal should be to have a complete list, which requires a detailed accounting gap analysis by professionals intimate with the new standard.
IT system changes may be time intensive
If changes to IT systems are needed, it will take longer to complete the implementation. Major ERP software companies, such as Oracle and SAP, are working on their revenue automation solutions to ensure they comply with the requirements of the new standard. Other software companies that offer niche solutions are also addressing some of the requirements of the new standard.
Mandatory retrospective transition adds complications
Unlike previous revenue standards that allowed companies to apply new rules prospectively to new transactions entered into after the effective date, this new standard requires retrospective adoption. For most companies, this will require a “look back” into historical transactions that remain open as of the effective date in order to recalculate historical revenue under the new rules; an exercise that may be complex and require additional time.
Desired changes in business strategies and contracting practices may require extra time
Some companies are finding that changes to their business strategy or customer contracting practices are required to avoid outcomes that are unintended or not reflective of the economic substance of the arrangement. In these cases, changes in pricing, fulfillment models, or other contracting practices may require additional lead time.
Opportunity to address current state gaps
Many companies are using this opportunity to design solutions that not only meet the requirements of the new standard, but also address existing gaps in their accounting processes and systems. For example, there may be an opportunity to automate certain accounting processes that are performed manually today using a spreadsheet program
In other words, time is of the essence. To avoid falling behind on the implementation of this new standard, companies should have a complete accounting assessment to determine the degree of impact. Now is the time for your organization to start the process toward transitioning to the new revenue recognition standard.