We’re not called The Revenue Experts for nothing.
We are fortunate to employ folks who eat, sleep and breathe revenue accounting. Honestly.
We’ve been thinking about the new revenue recognition guidance since before it was trendy. Don’t believe us? Consider the following “water cooler topic” among our technical accounting crew. It just might be the match needed to light a fire under a slow-moving transition effort.
In considering an implementation of the new standard, one of the more daunting tasks likely has been how to deal with past contract modifications. Really, how are you supposed to go back 5-10 years to the beginning of your contracts and play out all the contract modifications? Do you even have the information available to know the timing of the ‘when’ and the ‘how’?
Luckily for you, the Financial Accounting Standards Board (FASB) has proposed a practical expedient eliminating the need to separately evaluate all past modifications to a contract. Instead, you can look at the contract in its form at your earliest reporting period, determine transaction price, allocate that price to the performance obligations and determine the balance of all unsatisfied and partially satisfied performance obligations as your starting point. Going forward, you will have to use the standard to determine the correct treatment for modifications.
“Wow, this has the potential to be a huge lifesaver,” you’re saying to yourself right now.
You now have a future date as a starting point, but (and here’s where you’ll be excused if you break out in a case of the sweats)…
…if you are considering a full retrospective adoption, that date is literally right around the corner. For calendar-year-end public companies, you will be required to understand the state of all open contracts as of 12/31/2015 – yes, that December 31, 2015 – the one just a couple weeks away.
What can be done to help? We’ve brainstormed some useful tips for you:
1) Chances are your IT department performs regular backups of your accounting systems. That one at the end of the year becomes even more critical for you to help know the state of your contracts at that time. You need that backup to be done after the last booking and invoicing transactions are done for the year, but BEFORE order management starts changing existing orders. Make sure you look at any peripheral systems and include them in this process.
2) Start putting together a plan to continue this process at least quarterly, as well as a plan to determine how to get the information you need out of those backups.
3) Start capturing data you think you will need NOW. Like, today. Are you capturing the full TCV of the contract? Is a new trigger needed for revenue recognition? Are additional attributes about the customer or contract needed for reporting? You might not need these data points to drive current accounting or functionality now, but you will need a place to systematically store the information, and some processes and controls around its collection.
4) Start reviewing new contracts both ways. Although you probably haven’t set new policies in place, reviewing contracts within the context of the new standard will help in setting such policies, and highlight data and process gaps that’ll need to be filled sooner rather than later. Getting answers to questions about a two-month-old deal is much easier than seeking those same answers for a deal from two years ago.
As with anything, preparation is key.
There is a quote often attributed to Abraham Lincoln, “If I had eight hours to chop down a tree, I’d spend six sharpening my ax.”
Best to start sharpening your ax.
And from our water cooler to yours, you’re welcome.