Implementing the New Revenue Recognition Standards

By Erika Malzberg March 7, 2016

Contributed guest post by Leeyo.

Revenue is obviously a key measure that businesses use to assess their financial health. Unfortunately, how revenue is recognized is not so obvious. In May 2014, the FASB (Financial Accounting Standards Board) and IASB (international Accounting Standards Board) joined forces to provide new guidance around financial reporting to reconcile guidance from two different standards: GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards). While the purpose of this new guidance was sound, almost two years later the standards are still being clarified.

So how’s a finance professional to implement this new standard? Leeyo, the leading provider of software for revenue cycle automation, and a sponsor of our upcoming Subscribed 2016 conference, takes a look at these new revenue recognition standards and how businesses are responding.

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Let’s say you work in the financial services division of a company which has not only completed an assessment of the specific effects of the new revenue recognition standard, but has a plan detailing how to implement the new standard. You clearly work for an organization which is forward-thinking, competitive, ambitious…and, sadly, in the minority.

As the latest in a virtual avalanche of real-world findings, these being from Deloitte and KPMG, indicate, the vast majority of companies are taking a wait-and-see approach.

Less than 29 percent of companies have a plan in place on how to implement the new standard, and under 13 percent having completed their assessment of the effects of the new guidance for their firm, according to the recent KPMG survey of corporate financial preparers, as reported in CFO.com.

Why are folks dragging their feet?

A big reason – likely the bulk of it – is highlighted as a key takeaway from Deloitte’s adoption and transition observations of the new standard: Most companies are in the early phase of assessment, and many have yet to begin a formal assessment process – in part because of recent clarifications to the new standard which are still being finalized.

Yep, the newly converged standard, issued in 2014, is still undergoing clarifying changes as a result of questions raised with governing boards, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) – changes and concerns which have already pushed out the effective date one year.

But, are these mere clarifications or significant changes which would warrant a general consensus pointing to this as the reason to hold up implementation plans? Well, if actions speak louder than words (or, actions about words on some other actions, as the case may be), consider the following: Three additional meetings – in April, July and November – are now scheduled this year for the Joint Transition Resource Group (TRG) created by the FASB and the IASB to discuss ongoing implementation issues. Previously, the group announced its final meeting was to have been in November 2015.

Speaking of his firm’s recent survey findings, John Ebner, KPMG’s national managing partner-audit, said, “Both standards will require significant effort, and these results demonstrate the complexity of implementation across entire organizations.”

“I’m not surprised to hear folks are still waiting as there is a lot of confusion around the Transition Resource Group and the amendments the FASB issued in 2015,” said Dave Christensen, Managing Consultant with RGP, noting all the amendments were clarifications and improvements to the original standard. “I don’t believe any of the amendments changes a certain position, but rather strengthens a position,” he said. “For example, under the original standard, if I was 75 percent confident in position A and 25 percent (confident) in position B, the amendments made me 100 percent confident in position A.”

Revenue accountants would be forgiven for being somewhat oblivious to the revenue recognition changes coming down the pike, given their unending schedule of monthly and quarterly deadlines, but the inescapable buzz surrounding ASC 606 has been enough to keep those likely to be most affected both aware and hamstrung. Talking to some folks in this position, many are looking to their leadership teams to present education opportunities, come up with an execution plan and, essentially, steer the ship in the right direction for the new guidance, so to speak. Leeyo has recently launched a 2016 RevRec Action Plan to guide revenue professionals through this process.

Ironically, those in higher up positions within the financial hierarchy may be the least exposed to everyday revenue recognition rules and details. Revenue staffers waiting for someone to take charge may, therefore, be waiting longer than expected as individual deadlines come into play and future changes with a mandatory adoption date of 2018 might not be a priority.That effective date still could seem very far away for people – or organizations – unable to anticipate the amount of work (adoption method, anyone?) it will take to process revenue differently.

Today, unfortunately, too many revenue teams remain mired in internal challenges resulting in cumbersome manual processes which don’t allow the time or resources to do much in the way of in-depth research on the new guidance.

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How is your business responding to the new revenue recognition standards? Tell us about it in comments below.