Revenue management is a complex exercise for most businesses. The incoming guidance change in the form of ASC 606 has made it even more complicated. The new standards are based on one overarching principle: Companies must recognize revenue when goods and services are transferred to the customer, in an amount proportionate to what has been delivered at that point. This a paradigm shift in accounting and companies are struggling to meet the new compliance deadline.
Zuora RevPro, our industry-leading revenue recognition automation software, has helped more than a hundred companies of all sizes and industries with almost as many individual requirement scenarios work towards meeting the ASC 606 guidelines. During our partnership with these customers in implementing the solution and establishing processes, we’ve realized the most valuable commodity for ASC 606 adoption is experience. Since this is the first time for everybody – businesses, auditors, and regulators – many common (and often avoidable) mistakes tend to get repeated.
In order to help companies in the midst of the adoption process or those still figuring out a solution, we are sharing some of the most valuable lessons we’ve learned so far. Here are the top 3 lessons from our ASC 606 Implementations:
Adopting the new standards is not an IT project, it’s a business transformation project. Successful steering committees include executive sponsors, IT and business teams, SI and solution vendor representatives – all working together as one unified team. A steering committee aligned from the beginning allows for quick decisions and solutions when issues arise. In addition, it’s important to collaborate with the CFO and, where appropriate, investor relations groups on choosing the adoption method for the new guidance. This will help you gauge how the chosen method will be perceived in the public domain.
A proven framework for successful ASC 606 implementation involves the following milestones:
It is important to understand the system does not stop and start with your revenue recognition solution. A properly designed model includes upstream systems and processes. It is also essential to be flexible enough to change policies.
Upstream systems – those from which data flows into your ERP – are typically not out-of-the-box solutions, so take the time to carefully understand the data flow and isolate the most helpful samples. Nobody knows your data like you do and, therefore, it is up to you to help external parties understand it and also to apply this data to the selected solution.
There will be data conversion work, regardless of whether the method of adoption is full retrospective or modified retrospective. In fact, the most critical point in the project is the first data conversion cycle.
While a test run during User Acceptance Testing (UAT) using new transactions is beneficial, you will still be surprised the first time historical data is run through end-to-end. Until you start pushing all your data (historical and newly created) through your revenue system, you will have no visibility into the potential data gaps in your system. When you send data through your system, you’ll be able to see what bounces out, which integrations work, and what changes are necessary. Then, you need to make the changes and send the data through again, and again, until you eventually get clean results.
Keep in mind:
Getting a company’s auditors involved early and often is key to a successful implementation. From an auditing perspective, the implementation of ASC 606 is one of the biggest changes organizations must undergo. This change potentially impacts everything – policies, systems, processes, SOX, and audit controls.
Talk to your auditors during the data validation process. If you’re able to tie back validations to financials under ASC 605, figures with which the auditors should already be familiar, confidence will be established in relying on the delta between 605 and 606 financials. This can allow for testing to focus on what’s new, so validations can be tied to items already audited.
The reality is auditors themselves are struggling with how best to handle these new situations. They will need companies to meet them in the middle, whenever possible. Auditors will not know what that aforementioned delta is or how it was determined without your input.
Each implementation of this new, principles-based guidance will undoubtedly be specific to individual company needs and requirements. However, a clear understanding and application of the lessons outlined above can help to increase the success rate of this generational shift to your company’s finances.
For more, download our detailed e-book Lessons Learned From ASC606 Implementations