Stig Haavardtun, an Assurance Partner for PwC, joined a recent Zuora webinar to discuss how he sees PwC clients responding to the new revenue recognition standard and any likely IT impact. As an experienced professional guiding companies through accounting changes from the initial analysis phase through implementation, Haavardtun offers a valuable perspective on the revenue recognition topic at the forefront of everyone’s minds these days.
Here are a few highlights from his talk:
Common early planning steps:
“Most of the companies think of this initially as a technical accounting exercise… you need to have the accounting foundation to assess from an accounting perspective and determine how broad this project will be.”
On possible FASB deferral of the Effective Date:
“Most companies see (an effective date deferral) as more time to be able to be ready so that you don’t have to scramble as much as the original standard may have required…I’m not expecting a delay of the standard will result in a delay of the effort. It will be more laying it out so you can be more comfortable about getting it ready in time.”
New Standard Overview:
“This is a holistic new standard, meaning all previous revenue standards are being replaced. From that perspective, a lot of companies are not just thinking of this as an incremental exercise of what has changed compared to their historical accounting, but also ‘how should I go forward to address my revenue recognition to align with the new standard and the five-step process’. “
Potential Changes Identified:
“Most companies will have numerous different things that they’ll have to deal with, not just one area they’ll have to focus on…One of the areas from an accounting standpoint, companies are putting a lot of focus on are how to ensure completeness. Not just highlighting some key changes, but all of the key changes. There is a lot of thought around how you cover the various revenue streams, regional differences, things that will require effort to make sure. You don’t want to come late to the process and realize there are significant changes you did not capture in the upfront assessment.”
Impact from Broader Perspective:
“What we’re seeing is the core impact is obviously going to be on the core rev rec capability systems, whether that’s an ERP or software or through some form of manual process … but what we are seeing is impact on other parts of the quote-to-case process. For example, if you’re a software company that had never came up with fair value for your software license before, but need to do that under the new standard because it separated out, you may need information on list price, what the discount compared to list price, etc. that doesn’t always reside in the sales order or actual core documents you use for revenue accounting. This can bring in scope around other items that you’re not necessarily going to change, but use as a data source and identify what those data sources are and can be utilized by your revenue calculation engine.”
“What we’ve seen is there’s a lot more than just the core accounting system that will be impacted in the process.”
Technology – May need to update current software (ERP, revenue modules and other databases) to capture new information that was not necessary previously.
Controls Process – The standard requires companies to make more estimates and disclosures, calling for new controls and processes.
Business Opportunity – The new revenue standard may provide business opportunities around pricing strategy and/or product offerings and bundles.
Forecasting – Will need to reflect the new revenue recognition timing and patterns; as new patterns from the new standard and potential new strategies emerge, accurate forecasts may be difficult upon implementation.
Other considerations and functional impacts:
Compensation and bonus plans, contracts, tax implications and investor relations.
Approach to adoption:
“We think about this (adoption process) as generally a three step process. You start with an assess process then go on to convert and embed. What we see at the moment is most companies are still focused on the assess process, which is about getting started, doing a technical accounting assessment to look at the impact and ensure you have the proper governance in place to have all the groups included in the discussions to have proper communication within the organization to make sure everyone knows what is happening.”
“When it comes to convert and embed, depending on how much time you have, you may want to do these things in parallel.”
Digging deeper on the system side:
“We use the concept of use cases as a building block to get from accounting to business requirements and data elements. Working very closely between the IT and accounting side, you build out the requirements into specific transaction and transaction types and identify how those transaction types should operate under the new standard. What that allows you is to look at those transaction types to see what their requirements are, in order to perform these transactions… Are there things that are automatable or not? Are they things you can already do in your current system? Would some other module be able to capture? Would a new process need to be built out? Once you capture those requirements, then you can capture what data is needed in order to do that.”
“Investing sufficient time in building that bridge between accounting policy and technology requirement in the data is a key aspect and something we’ve seen as a success factor.”