A recent report by Gartner titled “New Revenue Recognition Rules Will Impact Finance, Business and Technology” (January 2018) identifies the impact of the new ASC 606 revenue recognition standards on the modernization of finance systems.
According to the report, not complying with the standards can result in a range of material impacts to your business. Most notable among them include:
- Highly visible audits and restatements, in addition to significant penalties
- Inaccurate valuations, credit ratings and borrowing costs
- Believing you have more money to spend or invest than you actually do
- Leaving money on the table and not investing money that is rightfully yours
The report highlights three primary areas of impacts:
- Failure to comply with new financial reporting requirements could trigger audits, restatements, penalties, valuations, borrowing costs and misunderstandings about cash availability.
- While the primary impact will be on financial systems and processes, the ripple effect of Accounting Standards Codification (ASC) 606 will extend into every corner of your business.
- Current technology solutions may be challenged or unable to support new compliance regulations and future business plans.
For many businesses, their existing solutions may be unable to support the new regulations and future business plans. “Relying on spreadsheets or manual calculations, or trying to reconcile information across multiple systems is often error-prone and less-than-adequate, causing later restatements.”
The report predicts that “by 2022, 70% of mid-to-large enterprise businesses will be using an automated revenue management solution to support complex billing and revenue recognition compliance.” Zuora Revpro is a great example. Our solution helps companies of all sizes automate their revenue recognition processes and helps them comply with the new guidelines.
Gartner offers the following recommendations for application leaders responsible for modernizing finance applications:
- Act immediately if you haven’t already. New standards will impact all types of businesses before 2020, so review and evaluate their applicability to your business. Noncompliance is not an option.
- Perform a companywide, cross-functional impact assessment and review of current and future business models and plans to reduce business risk and deliver improved solutions to customers.
- Review existing technology to understand the impact of becoming compliant on existing systems and processes. Consider upgrading or replacing legacy financial management systems (FMSs), or embracing specialized solutions that reduce the impact of new requirements, accelerate compliance, and support future business innovation and growth.
According to the report, “over time, even more sectors will be impacted as digital business drives the evolution of new business models in which more businesses will sell services alongside physical goods and embrace usage-based and subscription billing.” These include companies in the Subscription Economy with usage-billed billing, professional services, and other service-based offerings.
Gartner subscribers can download the entire report here.