On January 1, 2019, private companies with calendar-year annual reporting periods will need to comply with Financial Accounting Standard Board (FASB) Accounting Standard Codification (ASC) 606: Revenue from Contracts with Customers (ASC 606 or the New Revenue Standard). The New Revenue Standard replaces the existing revenue recognition guidance (including industry-specific guidance) with a single revenue recognition model intended to reduce complexity and increase financial statement comparability across companies and industries.
While many view the adoption of ASC 606 to be primarily an accounting exercise, the adoption of the new standard has far-reaching impacts within an organization beyond just the accounting function. All functions within an entity, including the chief information officer, should be involved in order to successfully implement the standard.
Why should CIOs care? Because CIOs and their IT departments serve a critical, strategic role in the compliance process. Publicly traded companies with calendar-year ends became subject to the standard in January 2018. In many of those implementations, CIOs and their teams had to significantly retool how their companies collect and process financial data.
Private company CIOs are likely to face similar challenges. Many may need to design new IT systems and data management protocols or implement new financial systems to aggregate, analyze, and extrapolate financial data. This is not only to comply with the new standard, but also to address risk of possible financial impacts and friction with external relationships, such as with vendors, lenders, and investors.
To advance the process of implementation, CIOs may benefit from considering the following:
1. It’s not just about the tool. Some organizations may focus their early efforts on choosing a revenue recognition engine, an important consideration, but not the only one. Companies also need to establish a master data management framework for a broad range of data types. Clarity in product hierarchies and definitions will be important to establish standalone selling prices required by the standard. Data quality issues are ever-present, and incomplete or inaccurate data often results from insufficient controls on existing systems. Staffing the implementation team with IT personnel is also important.
2. Finance and IT aren’t the only players. The New Revenue Standard will impact other parts of the organization, from sales to legal to human resources. For example, sales compensation may need to change. CIOs have a unique opportunity to unite disparate parts of the organization, both to establish IT’s relationship with other teams involved in the implementation and to help those parties understand their own roles.
3. Data and analytics loom large. Two types of issues that can arise around data and analytics are first, integration and preparation of data for the revenue engine itself; the strict interface protocols of revenue recognition engines require that data be loaded in a specific format, and second, the significant reporting and reconciliation requirements under ASC 606. It’s imperative that upstream transactional data, such as from billing systems, makes it into and through the engine.
4. Other upstream system issues warrant attention. Ordering and billing systems may not adequately capture data for compliance with ASC 606. For example, some information required for revenue recognition might be in a quote while other information might be on the order. It’s critical that independent data sets be accurately linked.
5. Opportunities accompany the challenges. Sometimes organizations are not eager to spend money on compliance, but there are potential ways to ease the pain. Automation can streamline existing processes or generate data that can improve pricing, increase profitability, and create new value-added services.
Five next steps
Several actions can help CIOs smooth the transition to ASC 606:
1. Determine business scenarios to address. Offering multiple product and service types is common in industries such as technology. Companies can benefit from categorizing offerings and business arrangements. Is the company selling products, services, or maintenance? Does it have long-term or month-to-month contracts?
2. Drill down into the scenarios. The makeup of finance teams can vary widely among private companies. CIOs can reach out to them to understand the accounting scenarios and outcomes they seek, and then plan accordingly.
3. Organize the work group. Representatives from many business functions should participate along with finance and IT, including sales, internal audit, and operations.
4. Tackle the contracts. Establishing an opening balance for existing contracts under the new standard could be an early challenge. A major task will be to evaluate how the contract accounting might change at the beginning of 2019.
5. Plan to stay involved. The process ofmeeting ASC 606 requirements has many moving parts. While finance is likely to drive the process, IT leaders should stay involved, especially to look for automation opportunities.
It’s time for action
ASC 606 implementation may fundamentally change how private companies treat revenue recognition. Awareness of implementation challenges and steps that private companies can take to ease the transition can help CIOs fulfill their role in the process.
Mark Davis is the National Managing Partner of Deloitte Private Enterprises for Deloitte & Touche LLP. He is an audit & assurance partner with over 32 years of accounting and auditing experience and has worked with companies across industries.
David Pierce is a managing director in Deloitte Consulting LLP’s Finance & Enterprise Performance Management practice with over 20 years of experience implementing solutions to improve finance efficiency and effectiveness through better access to information. David has recently been focused on advising organizations on achieving compliance with ASC606. He has led all elements of ASC606 compliance programs from strategy and design to implementation and sustainment.