By Jim Staats, Senior Account Manager at Zuora
The incoming revenue recognition standards, ASC 606 / IFRS 15, naturally mean a lot of changes to just about every company in all industries.
Right now, companies (at least the few not dawdling) should be looking at comparative sets of financials to see how things look today and how they’ll look after the 2018 effective date. However, this process of dual reporting is not, or should not be, confined to an examination of just company’s revenue line.
This new standard may impact many lines on a firm’s financial statements.
Let’s say a company’s revenue was $100 million under one guidance, and $90 million under another guidance. Can you stop there? No, Dual reporting is a more all-encompassing effort than simply comparing the difference in revenue numbers. The process requires an examination of all balances under each guidance. For example, did cost change along with revenue? Do you know have a contract asset balance that you need to report, just to name a few considerations.
Dual reporting under each guidance is the opportunity for a company to make sure anything touched – and/or altered – by the new standard, which goes way beyond revenue, is checked and double-checked. This is the exercise which should answer the question, “What would our financial statements look like under one guidance versus another guidance?”
That’s much bigger than, say, the difference between $100 million and $90 million in our earlier example.
We are talking right now to those thinking, “I just have to re-run my revenue number and get a new number under the incoming guidance, and I’m good.”
ASC 606 is likely to wreak havoc on more lines in your financial statement than just the big one. Processing dual books isn’t only processing dual revenue (making mental note for headline writer).
What are some of those other impacts to consider?
- While expenses in general may not change, specific expenses tied directly to revenue, such as commission expenses, may. Anything now considered a cost to fulfill must be examined. A prior practice of expensing everything upfront may need to be reconsidered in the face of having to capitalize the commission and recognize commission expenses again.
- The balances for what used to be deferred revenue versus contract liability versus contract assets will show up differently on a company’s balance sheet.
- Un-billed receivables are likely to change based on the change in how revenue is recognized and the definition of when something is considered a receivable, resulting in a new receivables balance.
- The days of minimal revenue disclosures in financial statements will soon be a thing of the past, given the necessity for more robust disclosures under ASC 606, as noted by the accounting and advisory firm of Baker Tilly and others.
And how can…
[blatant product plug coming in … 3 … 2 …. 1 ….]
…an automated revenue recognition solution such as RevPro help?
Well, for those new to the product, in all honesty, you’re out of time to run under both 605 and 606, so the recommendation is to continue doing what you’re doing, which RevPro allows for you to do. As you determine and apply the necessary changes upstream to be in compliance with the new guidance, RevPro provides for an automated way of calculating these items at the detail level and reporting on them under 606.
Remember, though, the new numbers don’t start and stop with revenue. Changes will come to other lines across your company’s financial statement.