Contributing Author: Brian Evans
Accounting standard ASC606 is a notable change to the way revenue is recognized and reported from contracts. Organizations have mostly managed to track and analyze revenue from contracts using a myriad of tools (spreadsheets!), and subsequently enter results into the GL when revenue was recognizable.
That may no longer be an option; the new revenue recognition standard requires organizations to implement and present additional quantitative and qualitative elements and the results for the current and two prior years by 2018 for public and 2019 for private companies. How can IT get in front of changes upcoming to the accounting function by anticipating the technology-related challenges and demand?
If accounting leadership and IT have not already put a plan in place for rev rec, it’s not time to panic, but get moving! The AICPA has released some suggested steps and actions (in summary):
- Organize a cross-functional project team (accounting, IT, finance, sales, audit & legal)
- Learn how your organization currently tracks, recognizes and reports revenue from contracts
- Selecting a method for retrospectively adopting the new standard (full vs. modified)
- Investigating the tools available on the market that can assist your organization
Depending on the number, complexity and scope of your organization’s customer contracts, and your current ERP, the new rule may require significant investment (time, systems, auditors, consultants). To maximize efficiency, IT should be prepared to equip accountants with systems to gather and utilize the necessary information. What are some of the options?
- Option 1: Leverage your existing ERP or convert to one that accommodates your needs. Most major ERPs are offering revenue management solutions for adopting the new standard. Several cloud-based ERP’s, like Workday and Intacct, have deployed SOX compliant, flexible and automated tools to accommodate the complexities presented by the new standard. The advantage to these systems is they offer integrated general ledger functionality and robust web-based API’s for loading historical contract revenue data. They may also present an opportunity to enhance revenue-reporting and analysis by having all the data in a single system. Lastly, cloud ERPs may present the best opportunity to not only accommodate ASC606 changes, but also can rapidly deploy functionality updates to handle future regulatory changes as well.
- Option 2: Purchase or upgrade a bolt-on solution to integrate with your current ERP. Several vendors offer industry-specific revenue management solutions that may be best suited for your organization. A bolt-on approach may perpetuate disparate systems; resulting in higher total cost of ownership and producing complications for reporting, tracking and analyzing revenue.
- Option 3: Use a myriad of tools or homegrown solutions to accommodate the change. This option should be approached with caution, and is likely only an option for an organization largely unaffected by the new standard. Even with the best spreadsheet technician in the world, this option is prone to errors and simply isn’t a great solution for most organizations.
Acting now to plan, estimate and select an approach is an advisable and valuable activity. The decided approach will have a lasting impact. Depending on your IT portfolio strategy, your organization’s aptitude to change and innovation, and the cumulative effect this new standard will have on your organization’s accounting practices, it may be an opportunity to pursue an ERP that provides automated tools for migrating and converting contract data to adopt ASC606 and manage all customer contracts in one system.