Five Reasons You Shouldn’t Put Off Getting Ready for the New Revenue Recognition Standard

Many companies are waiting to analyze or take steps towards implementing ASC 606, Revenue from Contracts with Customers, either because they think the effective date is too far in the future or simply because they assume it will have very little impact on their companies.  Here are five reasons companies should not delay taking a serious look at ASC 606:

1. Timing of Revenue Recognition. There are many ways the new standard can change the timing of revenue recognition, such as the requirement to recognize variable consideration, the requirement to identify distinct performance obligations that didn’t qualify as separate deliverables under existing accounting standards, or (for software companies) no longer requiring VSOE of fair value of deliverables in order to recognize revenue. All of these changes require careful analysis and planning in order to be ready for the new standard.
2. Documentation. Regardless of whether there will be any changes to the timing of revenue for your company, there are a plethora of decisions and judgments that will need to be made and documentation to support them is paramount. The decision process may be lengthy, and the documentation may be extensive. Even if a company’s revenue is “simple,” there are several areas requiring new documentation (e.g., the point in time when a “contract” exists and when a performance obligation(s) is satisfied).
3. Pervasiveness. The new standard will have pervasive effects throughout a company. Not only will it affect finance and accounting, but it may require rethinking sales compensation arrangements, the need for revised revenue contracts, possible new arrangements with your distribution channels, and the need to revise and create new information systems, processes and controls. The impact on revenue recognition may even require renegotiation of debt covenants.
4. Information Systems. Companies will need to gather data to support their judgments and possibly implement information system changes so that necessary new data is captured to allow for proper revenue recognition under the new standard. You will need time to determine what solutions are available and right for your situation, how they will integrate with existing information systems, the complexity and time to implement new systems and their effect on business processes and internal controls.
5. Financial Reporting Transition Method. Companies need to allow ample time for management to come up with an implementation plan and determine under which transition method the new standard will be applied (“full retrospective” or “modified retrospective”). Companies will need to be able to capture information necessary to restate their financial statements as soon as the first quarter of 2016. Everybody will need training. The audit committee, auditors and internal audit need to have lead time to review and approve implementation decisions and judgments before the last minute.  Stakeholders will need to be educated about the impact the standard will have on reported revenues.

It is inevitable that delaying until it is too close to the deadline will make implementation more costly and mistakes more likely. If these reasons aren’t enough, there are plenty more.  For a complimentary one hour training and consultation, contact us.