The Financial Accounting Standards Board (FASB) issued ASC 606—Revenue from Contracts with Customers, in May 2014, which will replace nearly all current revenue recognition guidance for private companies beginning in January 2019. Most public companies began following the new guidance this year. An informal survey of articles, blog posts and anecdotes from public company CFOs and accounting consultants revealed a consistent theme: the transition required more time and resources than anticipated so the more you do, and the earlier you do it, the smoother the transition will be. With just a few months to go before the deadline, private companies are well advised to take advantage of some of the lessons learned by their public company counterparts. We have distilled the comments and cautionary tales of public-company ASC 606 implementation into five key reasons why it is critical that private companies DO MORe NOW to prepare to address new revenue recognition requirements.
D = Disruption. There’s no way around it: completely changing the way a business recognizes revenue will cause disruptions. Even FASB understood how significant an undertaking ASC 606 would be and delayed its implementation from the original date to give companies more time to prepare. Public companies and early adopters confirm that adopting the new ASC 606 guidelines can be overwhelming. The standard is complex, can require significant changes in the way the company thinks about revenue, and may involve process and information technology changes that require time to implement. With just a few more months left in 2018, private entities should already be working enterprise-wide to plan for implementation, which will minimize disruptions and stress for each department.
O = Organization. Your entire organization—finance, information technology, operations, marketing, and sales—will have to weigh in on ASC 606 implementation. For example, marketing and sales will need to understand how discounting or certain promises will impact the recognition of revenue and costs, and accounting will need to understand how marketing and sales activities impact the nature of agreements and contracts. Organization, as in getting organized and bringing all the stakeholders together to ensure understanding and formulate cross-departmental plans, will be critical for a smooth transition.
M = Metrics. When and how revenue is recognized impacts the metrics that are integral to banking covenants, employee commissions and bonuses, and budgets. The earlier a business starts planning for the new process, the sooner it will be able to develop accurate estimates for these metrics. With these calculations completed, it may be necessary to consult with banks and bonding about financial covenants. Employee compensation packages may need to be renegotiated or adjusted if commissions or bonuses will be impacted. Additionally, some external parties may expect to see the effects in monthly or quarterly reporting throughout 2019.
O = Opportunities. The analysis and communication inherent in planning for ASC 606 implementation will surely reveal opportunities for operational improvements. Expect to identify processes that can be automated, for example, and don’t be surprised when the collaboration between departments leads to improvements in efficiency. Perhaps the greatest opportunities will come when contracts are carefully reviewed to determine how the new revenue recognition processes will affect them. Terms, pricing and discount strategies may need to be adjusted or renegotiated to achieve ASC 606 compliance.
Re = Resources. Internal resources at most private companies are already stretched thin, and the addition of the implementation of a complex project like this will only add to the burden. Starting planning and implementation for compliance now (if it’s not already underway) will help keep internal resources such as staff-hours within predictable limits. External resources your business might need to help support implementation are expected to become more and more scarce as the implementation deadline draws near. Public companies reported having a hard time finding the qualified consultants and personnel they needed. There are significantly more private companies than public companies, so shortages of resources are virtually certain.
The complexity and scope of ASC 606 should be motivating businesses to DO MORe NOW to ensure they’re ready to comply on January 1, 2019–less than four months from now. Wherever your business is in its ASC 606 journey, Williams, Benator & Libby, LLP has a team of revenue recognition experts ready to guide you through the complexities and minimize disruptions.