Editor’s note: Today’s post is the latest from our new guest columnist, Shauna Watson, Global Managing Director of Finance & Accounting for RGP. Shauna, a subject matter expert in U.S. GAAP, IFRS, SEC and PCAOB regulations, will share her valued opinion on a number of topics in this space.
Although implementation of the new revenue recognition standard for any company is likely to be run by the finance and accounting departments, which will ultimately be responsible for the initiative, an organization-spanning cross-functional understanding is both important and necessary. Here’s a look at the new standard from other perspectives in an organization:
- From a systems perspective, your Information Technology folks should be involved. IT may be one of the areas most heavily impacted and involving them early is critical for these reasons: determining whether or not your systems have the ability to run parallel under the old and new model for at least 2017, if you do the modified retrospective adoption, but also 2015 and 2016 if you do the full retrospective presentation (assuming the FASB doesn’t delay the effective date); making sure you have good contract data in the system from a historical basis and governance over that data; considering your capital budget requirement and getting money in the budget if you think you’ll need a system modification or upgrade (which is likely for most companies) to account for the separate performance obligations, gather data for disclosures, capitalize and amortize acquisition and fulfillment costs, calculate and allocate transaction price, and reduce spreadsheet risk.
- From a process and controls standpoint, there are dual reporting requirements as mentioned above, which need to be auditable for public companies with SOX-like processes and controls.
- Training will need to take place across all levels and departments of the organization, down to very operational levels, for the many people whose involvement and understanding of the impact is necessary.
- Communication will be key both externally to your investors and analysts and internally to management and the board to keep their expectations clear. In addition, there could be changes to key metrics if you have a significant change in either the timing or the amount of revenue recognized. In many cases, revenue might be recognized earlier, but we all know that doesn’t mean there’s more revenue, just that it is earlier. Your communications team will want to make sure they have a good idea of the trending to manage expectations. Updates to the internal FP&A models performed early can help with the quantitative impact assessment and communication plan.
- Other contracts, which include revenue and related metrics, such as bonuses, commission structures and stock compensation plans, will be affected. Many executive compensation plans have performance multipliers which extend three or four years, depending on vesting. You’ll want to make sure you know what that performance multiplier is going to look like at that end point so contracts canbe modified to maintain original intent. Other contracts such as earn outs, debt covenants or even sales contracts, especially in a software-type industry, have specific provisions to recognize revenue such that it wasn’t contingent and often came at a cost to the company. To the extent those could be removed, a coordinated approach with sales and marketing will be necessary to ensure astute business decisions are being made to optimize those provisions.
- Tax implications need to be considered early, especially if a tax accounting method change may be warranted.
- And, finally, from a staffing perspective, this will clearly be a time-consuming effort because even if you think your accounting won’t change much, the process required to analyze the contracts, even to prove there is no impact, collecting data for new disclosure requirements, additional documentation for accounting policies, writing white papers and supporting judgments and estimates, will leave no shortage of work for everyone involved.
Clearly, this implementation isn’t just a finance and accounting project.