Now that the FASB has finalized the effective date for the new revenue recognition rules, public companies are working their way through the complex standard to meet the mandatory compliance deadline of 2018, beginning with the first quarter in 2018. While that timing may appear to afford CFOs ample time to prepare, Shauna Watson, RGP’s Global Managing Director for Finance and Accounting, reports that many finance chiefs are finding the process far more difficult and time-consuming than anticipated. “Many finance executives, at first glance, believe their companies will not be impacted. But once they actually get into an assessment, these same executives are surprised at the amount of work that must be done to comply,” says Shauna, who identifies five key challenges that must be overcome:
1. Interpreting the Standard. The technical assessment and gap analysis are certainly challenging, and not just because the guidance is still changing in some areas. The “rules” currently relied upon for accounting treatment in US GAAP are being replaced by principles, which require more judgments and estimates. Even though many transactions may be reflected similarly in the financial statements, the increased subjectivity necessitates changes in financial processes, increased controls, and extensive documentation. It’s not that finance executives are uncomfortable with their ability to make such judgments; rather, they are concerned as to how auditors and regulators will scrutinize them, particularly with the benefit of hindsight.
2. Gathering Data. When embarking on their assessments, some companies may be unsure as to whether they have a complete population of contracts and amendments to assess. Contracts may be hard copy or electronic, may be kept at corporate or in business units, and may be in multiple languages. Some contracts may not be fully documented, and some may have been modified with amendments or side letters. The level of effort involved in assessing contracts will depend on whether provisions are standardized across contracts and revenue streams, the number and length of contracts, contract duration, and the difficulty in locating the contracts. For many companies, this means that compliance in 2018 requires contracting policy changes now, i.e., increased internal controls around contract review, including extra review at corporate if contracts meet certain metrics of materiality or complexity.
3. Managing the Project. Depending on the extent of the effort expected based on the initial gap analysis, creating a project office to manage the implementation can help ensure a successful, on-time completion. Project management should scope a detailed plan for designing and implementing a solution to meet the deadline, and ultimately produce a project roadmap that details the key milestones and activities necessary to achieve them, working back from the required go-live date. Communication and focus are key to coordinating all the activities and people necessary to wrap this up.
4. Assessing Systems. Some companies will be able to modify their current systems to reflect the new revenue recognition standard, while others might see the accounting change as a catalyst for implementing systems that are better able to manage the complexity of the new standard. Finance teams currently relying on manual processes and Excel spreadsheets will once again be asked to consider the risks that these carry, which is being increased further by the complexity and administrative reassessment burden of the new standard. For those who are currently using manual processes, an automated solution offers a more sustainable path forward.
5. Choosing a Team. Your dedicated team will make or break any effort to implement the new revenue recognition standard. Many finance professionals are already overwhelmed by day-to-day activities and special projects, so for some companies, implementing a new accounting standard (or several) could represent a tipping point. It is therefore essential that project management lead a frank discussion about the company’s ability to execute the project, including a discussion of whether external advisors should help with one or more work streams. Regardless of whether the project is executed internally or with outside help, many levels of the finance organization, and the business, will need to be trained to act in concert with new revenue recognition processes.
A revenue recognition transition that is efficiently managed and successfully executed will allow the company to comply with the new standard and reflect well on the CFO’s organization. A willingness to assess the impact of the standard now will help the CFO get implementation off to a timely start and avoid unwanted last-minute surprises. For more information on revenue recognition, click here.