What is Keeping You from Being Ready for ASC 606 and IFRS 15?

Ready or not, ASC 606 deadlines are coming. Companies are struggling to implement the new revenue recognition guidance. Surprisingly, EY recently found that 14% of companies have not yet begun working on the new rules and 70% of companies are not yet finished.1 Only a little under a month remains before the new guidance is effective for public companies with annual reporting periods beginning after December 15, 2017.

Let's explore some of the reasons companies are finding it difficult to implement the new rules:

Interpreting The Guidance When Bright Lines Do Not Exist

There are many changes to how we technically "account" for the new guidance and bright lines aren't always available. We are moving from a "rules based" world to a much more interpretive world for revenue recognition. As companies seek to implement the new guidance, they may be struggling to find the prescriptive accounting they are familiar with.

For example, in the process of calculating discount allocations using stand-alone value, it is not easy to find an example of what to do with "contingent" revenue as defined in legacy GAAP guidance for allocations. Accountants are accustomed to deferring a carve out into the product until the services have begun delivery. I set out to determine whether or not adoption of the new guidance means we no longer have to defer that revenue and can recognize it into product before the service begins. Unfortunately, there is no prescriptive guidance on this particular issue. I suspected that the old "contingent" revenue concept no longer existed, but I would have felt much more comfortable if I had found the specific guidance proving my theory correct.

In the end, I couldn't find prescriptive guidance, as many of us won't with the new principles-based rules. Fortunately, I am involved in several round table discussions with my peers regarding issues that come up around the new guidance. I was able to bounce my theory off the team and confirmed that, as suspected, we are no longer required to defer a carve out into product from a service that has not begun. The lesson learned is that even though there may not be proscribed rules for handling every scenario that arises, we can use groups of industry peers to help us arrive at conclusions. As companies are implementing, questions are going to arise and it is taking time to resolve them. Is that causing delays in implementing the new guidance? Absolutely!

Implementing System And Process Changes With IT Groups

Possible gaps in communications with scarce resources available in the IT department and limitations in systems are also causing delays. It takes time to redesign systems to account for variable consideration, for example.

The reality is that IT resources need to be brought up to speed regarding system requirements for the new rules. Meetings and corroboration take time and may be more involved than initially thought. In most companies, IT resources are constrained and priority needs to be set from the top down in order to allocate resources to the new guidance project. It is a balancing act because an IT group that is focused on the new guidance can't dedicate resources to making progress in other important areas such as bringing new products to market and restructuring systems and processes to handle those new products.

Additionally, if a company's existing infrastructure and business process needs to change, they may be finding that they should have used "change management" personnel to make sure processes and systems are on schedule to morph into the needs of new guidance in a timely manner.

Stretching Limited Resources

Lack of staff is another big reason that change is difficult in the revenue arena. Revenue recognition folks are busy with their "day" jobs interpreting contracts and accounting for and structuring deals to follow current GAAP guidelines. Traditionally, these teams are understaffed and don't have the capacity to increase their already long hours at work to account for transactions two different ways – one under the new guidance and one under the old guidance for comparative reporting. Experienced revenue recognition staff have always been in high demand and were already a scarce resource before the new revenue recognition rules were proposed. Hiring consultants would seem like a good answer to free up the burden on revenue departments; however, at this point, most consultants are already working on the guidance for other companies. This resource scarcity is leaving revenue teams over-taxed and less efficient at moving forward in time to meet the looming deadline of December 15, 2017.

What can a company do to combat this? Automation is one answer. The more quickly you can move your revenue recognition off spreadsheets and into more advanced revenue recognition software, the sooner your staff is freed up to improve efficiency and accuracy of revenue transactions in accordance with legacy and new GAAP rules. Many software vendors are emerging with solutions for the five steps of the new guidance.

Lobbying For More Funding

Finally, if you manage to find the extra resources you need, you may have underestimated the time and cost needed to implement the new guidance. How are you going to pay for those extra resources? The revenue project funding initially approved was likely for a certain amount and any remaining funds were quickly reallocated to other projects. Companies are finding that they need more resources and time than originally anticipated. They need to ask for more funding so cash is available to complete the project. Those additional funds will have be diverted from other ongoing projects which often means slowing down new product development and limiting marketing resources for those new products in order to provide this additional funding. The process to get access to additional funds takes time!

With revenue recognition being the largest line on the P&L, realigning to adopt the new guidance is proving to be more time and resource intensive than originally thought for many companies. If you haven't already started, time is of the essence. If you have already started and are inching towards the finish line, search for ways to improve efficiency and engage consultants as needed. Let your company know that, in the end, the new rules take time and resources to implement. An investment now in the proper business processes and automation will reap rewards for the company in the future.

Looking for more advice on implementing ASC 606? View our recent webinar, Implementing ASC 606 / IFRS 15, Revenue from Contracts with Customers.

[1] EY, Revenue Recognition Survey finds many companies not ready for changes, with CFOs and CIOs differing about the reasons, New York, June 6, 2017

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