One of the biggest accounting changes the world has seen recently is looming over CFOs and controllers worldwide. The new revenue recognition standard (ASC 606) is a set of regulations on revenue from contracts with customers. It is touted to remove the inconsistencies and weaknesses of current standards across the board by implementing a single, principal-based approach for the U.S. and Europe.
While it may feel like everyone has been talking about the ASC 606 adoption deadline for some time, the harsh reality is that not every business has jumped onboard with the demanding overhaul of business practices it requires.
These new guidelines are proving to be an overwhelming process that demands a tremendous amount of dedication, planning and organization. And the bottom line for businesses: precious operational resources – finance, sales, operations, services and IT – all have pivotal roles in the planning. What does this mean for your organization?
The new revenue recognition model’s core principle, outlined below, consists of a new five-step process:
- Identify the contract with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price.
- Recognize revenue when or as you satisfy a performance obligation.
Companies will be able to choose how to make the transition and report the impact as part of its financial statements by using the full retrospective approach or the modified approach – while complying with disclosures requirements.
Most necessary in this restructuring is securing an experienced, specialized technology partner that can provide revenue management and accounting solutions that will comply with new standards. Your advisory partner should be well-versed on the ways the revenue standard is likely to impact your specific industry and understand the complexity of revenue recognition changes.
Your organization will need to undergo many lengthy assessments, evaluations, and training sessions as the new model will have revised accounting policies, new processes, control points, disclosures and systems.
More specifically, companies in every industry will be required to adopt flexible systems so that they can adapt to new requirements and comply with evolving regulatory standards – now and in the future. The customized NetSuite system comes equipped with full functionality for compliance with the latest American Institute of Certified Public Accountants (AICPA), Financial Accounting
Standards Board (FASB) and International Accounting Standards Board (IASB) requirements, and is highly configurable and fully integrated with core financial applications and ASC 606 standards.
What will be the impact on financial results?
According to FASB, the new standard will: remove weaknesses in revenue reporting requirements; provide a framework for addressing revenue issues; improve revenue recognition practices; provide more useful financial statement information and improve disclosure requirements.
Remember that old saying that “hard work pays off…eventually”? These process compliance changes are basically going to be the foundation for a next-generation revenue engine that features a fully automated workflow. By adopting a flexible system that adapts to the new requirements – with a modern, agile financial management/ERP system like NetSuite – organizations will be poised for future regulatory changes in the business landscape.
The time for getting started on this change is now. Hopefully you have already taken the time, or plan on doing so soon, to develop a transition plan, review your existing contract and revenue processes, initiate an auditor’s review of policy and scenarios and have existing financial systems assessed.
The next step is to define business process requirements and internal controls, draft disclosures, execute data retention processes, develop training, define financial system requirements and select a vendor.
Once those items are complete, you will need to spend the majority of the coming year to develop reporting processes, implement internal controls, implement training strategy and deploy financial systems.
User acceptance testing and reporting finalization will be the final step of the two-year preparation to meet the January 2018 adoption date. It’s important to outline your current state in order to identify gaps and align a system internally.
Contact our NetSuite professionals to discuss a solution pathway that will customize a functional system to align your needs with the new revenue regulation requirements.