9 Steps to Prepare for ASC-606 Compliance
It's been a few years since the May 2014 release of the FASB's and IASB's new revenue standard, Revenue from Contracts with Customers. Impact of the standard will be felt across all industries.
The new standard replaces almost all current revenue guidance (including industry-specific guidance), greatly enhances related disclosure requirements and requires management to exercise significant judgment when determining expected revenue from contracts. New processes, systems and internal controls will be needed to account for contracts with customers under the new standard.
All of these activities require significant time and effort.
The deadline for public companies to achieve compliance is for fiscal years beginning after December 15, 2017. All others follow a year later. It's time to figure out what you need to do now in order to get there.
Over 40% of the organizations polled in a recent study have not determined which transition method they will use in the adoption of the new standard. Most that have started the transition are still in the early stages.
Time is critical and there’s a lot to do. Think of this as an opportunity to identify weaknesses in your contracts and processes. The objective should be to reduce the number of contract exceptions and streamline your processes to reduce the amount of handling each contract receives.
Below are 9 steps to get you on track to compliance:
Build an internal team. This team will perform an initial assessment of the impact of the new guidance, communicate the impact and outline the strategy. A properly staffed team should include players from revenue management, IT and each department involved in the quote-to-cash process. If you don’t have in-house revenue management expertise, include your audit firm. The team needs to understand the impact of the new guidance and whether it means you have to change the way you book or sell in order to create better processes from a revenue recognition standpoint.
- Evaluate significant revenue streams. Don't limit yourself to lines of business or "products and services".
- Identify, evaluate and summarize contract types. This includes identification of performance obligations and variable transaction price considerations. Sufficient time should be allowed to identify and analyze contracts to enable efficiency, consistency and quality across the organization. Templates for gap analysis and contract reviews should capture information for future phases of the transition effort.
- Establish new policy requirements, where appropriate.
Analyze and determine additional disclosure requirements. Identify how information to support disclosures will be provided.
Evaluate impact on periodic financial processes. Identify data gaps and process requirements.
- Design system changes, where needed
- Manage expectations around business planning and analytic reporting. Management and investors should be educated as to the expected impact of the new standard.
- Develop a project plan and roadmap. This should include key activities and milestones, training requirements and a detailed work-plan.
If you have not begun a process similar to the above, you're behind the curve. Make the commitment now and your transition to the new standard will be much smoother.
For more information on how to overcome revenue recognition and contract management challenges with the implications of the new standard, check out our recent on demand webinar