Insights

Beyond the 5-Steps: A Comprehensive Look at Implementing the New Revenue Recognition Guidance - Part 2

Getting Started

In part 1 of this series, I addressed the implementation landscape, and how many companies have not yet begun their efforts to implement the new revenue recognition guidance. In this post, I provide some thoughts on what these companies should be doing now to get started.

If I were a betting man, I’d be willing to wager that most CFO’s, CAO’s, Accounting Directors and the like have heard (numerous times now) that the “assessment” is the first step in the implementation process.  I would also bet however, that most of these same individuals do not have a clear understanding of what the assessment actually is or what it involves.  In this article therefore, I will dive into the assessment, and provide insight into what companies should consider as they begin their journey of implementing the new revenue recognition standard.

In simple terms, the purpose of the assessment is to identify the impacts of adopting the new revenue recognition guidance, which in turn will allow for effective planning of the remainder of the implementation efforts.  Practically speaking however, the assessment can be very broad, and the exact scope will depend on the facts and circumstances specific to each company.  Below, I provide what I believe are the key categories of assessment activities, along with the scope of each activity under the extreme ends of the assessment spectrum (“Fast Track” and “Extensive”).  The right answer for most companies will likely fall somewhere in between.

1. Project set-up - Adoption of the new revenue recognition standard is likely to have wide-ranging organizational impacts, so it is critical to view and plan for this project accordingly (i.e. not only as an accounting exercise).

Fast Track - Creation of project team, steering committee, communication protocols, overall engagement structure (e.g. centralized vs de-centralized), etc.

Extensive – Same. 

2. Inventory - Companies will not be able identify what is changing until they know where they stand today.  A robust inventory of revenue streams, contract provisions and current revenue recognition policies is therefore critical.   

Fast Track – Identify and document significant revenue streams, contract provisions and current revenue recognition policies.

Extensive – Identify and document all revenue streams, contract provisions and current revenue recognition policies.

3. Accounting Analysis - All companies will have to update their revenue recognition documentation, regardless of whether the accounting actually changes.

Fast Track – High level identification of accounting differences for significant revenue streams.

Extensive – Full accounting analysis, including documentation of new revenue recognition policies and auditor sign-off for all revenue streams.

4. Assessment of Other Business Impacts - Implementation of the new standard is much more than an accounting exercise, and for many, the bulk of the efforts and biggest impacts will extend beyond the accounting.

Fast Track – N/A – Accounting focus only.

Extensive – In addition to the accounting, the assessment also includes disclosures and wider business impacts (e.g. sales team, processes, systems, controls, etc.).

5. Project Plan

Fast Track – High level project plan for remainder of implementation efforts.

Extensive – Detailed project plan for remainder of implementation efforts.

The key benefit of the Fast Track approach is it is just that, fast, so it can provide an overview of the key impacts in a relatively short time frame (as quickly as a few weeks for some). This approach might make sense for companies that are currently resource constrained, or that have not yet received “buy-in” from senior level management.  The downside is that the additional activities from the Extensive approach still need to be completed, so in a sense it is just delaying the inevitable. 

I suspect that most companies will find implementation to require substantial effort, from the point the assessment begins all the way through the initial adoption of the new guidance (2018 for public companies). Therefore, regardless of the assessment approach selected, the key is to get started now!

 

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