ASC 606: How CFOs Can Plan for New Revenue Recognition Standards

As if CFOs didn’t have enough on their plates with digital, automation and talent disruptions, the Financial Accounting Standards Board (FASB) recently updated their revenue recognition standards (ASC 606), ensuring that CFOs will be even busier in 2018. Issued as a means of standardizing revenue recognition in the global services economy, the new standards mean CFOs will lead adjustments in policies, systems, processes and controls for reporting revenue — arguably the most important metric in financial statements. Bloomberg calls it “the most historic accounting changes to hit U.S. capital markets in decades.”

Although the extended December 2017 deadline for calendar year-end public companies to comply with the ASC 606 has passed, the reality is that most organizations are still way behind in addressing the issue. In fact, according to several research firms, CFOs are at risk of falling behind schedule, as  most have yet to complete their revenue recognition programs. 

The slow progress isn’t surprising, especially since the implications of the new standard are widespread  and impact business functions well beyond accounting practices and processes. In order for CFOs to fully transform their revenue recognition programs — and move from simply complying to driving long-term value — they will need to demand a comprehensive overhaul across all aspects of their businesses. That means business process leaders in many cross-functional departments will also feel the strain of the new regulation.  

CFOs will undoubtedly play the leading role in assessing and adopting the new standards, but many will need the expertise of multiple other functions  in order to implement them properly. Significant amounts of time, planning and coordination may be required across these five key areas:

Finance & Accounting


As the primary function tasked with implementing the new standards, the first step for accounting and finance executives is to gain an understanding of the new guidance and begin assessing its implications for your industry and for your business. Compare the new guidance to your company’s current accounting practices to uncover necessary changes in technical accounting areas, like identifying areas where revenue touches the operational and market components of the enterprise. 

Pinpoint which other stakeholders will need to be involved going forward, and engage the business process leaders in those areas to understand the impact the new standards will have on their processes and the scope of changes required in order to ensure compliance. 

Information Technology


For many companies, particularly larger entities, the IT department will need to be involved heavily and early in the process to facilitate and design system changes. The new standards for revenue recognition may require updated methods of data collection, new data sources and automation of different calculations and disclosures. 

The biggest challenge for CFOs and IT business leaders may well be navigating the move from a “rules-based” system to a “judgement-based” one requiring different estimates and calculations as a result of the more principles-based standards. The ASC 606 may require organizations to track information they may not have previously monitored, and the systems associated with that information will need to be modified to support the tracking of additional data elements — some of which may not be supported by legacy systems. 

For example, many companies’ existing sales and financial systems likely will have to be updated to include varying recognition patterns, depending on contract terms, and accumulate data for disclosure purposes. The role of IT then becomes paramount in ensuring the appropriate information is captured, scalable throughout the whole organization and available to support management’s decision-making process.  

Legal 


An organization’s legal function will likely need to be engaged in the implementation of the new standards, as the updated guidance includes different criteria for what signifies a valid agreement for revenue recognition. For example, under the new standards, revenue can only be recognized for agreements that are legally enforceable, regardless of whether the agreement or contract is written, oral or implied by customary business practices. 

The issue of contract reviews and adjustments presents a huge challenge for CFOs. This is a critical element of transition activities and can require substantial time and resources to complete as the number of individual and non-standard contracts increases. In fact, many CFOs are taken by surprise by the sheer volume of nonstandard contracts and the strain those will inflict on their legal counterparts.   

Tax Department


For any CFO anticipating changes in their accounting as a result of the ASC 606, the impact on their tax accounting must be considered. For example, when it comes to federal income tax, it’s common for an enterprise to use one or more tax methods of accounting that estimate, or rely deeply on, the revenue recognition policies and methods used for financial reporting. As a result, , before making any modifications to the original financial accounting methods, processes, data and IT systems used to support such methods, you’ll need to assess the impact these modifications will have on tax accounting positions, policies and calculations. 

Many organizations overlook the importance of including their tax professionals in both the assessment and implementation phases of the revenue recognition rules. Even beyond the federal income tax aspect, several other areas within the tax function may be affected, including tax compliance processes, transfer pricing schemes, taxable income and calculation of sales tax based on changes in a company’s mix between product and service revenue. 

HR Function


As with any major undertaking of this nature, implementation of the ASC 606 will likely require significant resources and additional skilled talent. Given the talent shortages and skill gaps already present within the accounting and finance sector, many CFOs will need to engage outside partners to secure the specific and additional talent they need in order  to complete the assessment and implementation of the new standards. 

In addition, the new guidance may necessitate extensive training for accountants tasked with applying the new standards, as well as any cross-functional staff involved in negotiating and reviewing customer contracts. This can include salespeople, legal staff, investor relations and executive leadership. 

Even the issue of compensation will need to be tackled collaboratively between CFOs and their HR counterparts, as the new standard affects when revenue is recognized. Executive bonuses, sales commissions and any form of compensation linked to revenue-related metrics can have a big impact on the compliance with ASC 606.

Start Engaging Business Process Leaders Now to Help Alleviate Strains


Revenue recognition is one of the most critical — and often complex — metrics that companies can’t afford to get wrong. And although the early stages of implementing the ASC 606 will be very accounting-oriented, now is the time to begin expanding the process to include other parts of the organization. For those enterprises that effectively engage and collaborate cross-functionally, revenue readiness can drive business transformation in critical areas, like strategic cost reduction, data quality improvements, data-driven insights and tax efficiencies.