The deadline for implementation of the new revenue recognition guidance, ASC 606, by calendar year-end public entities was their first quarter beginning Jan. 1, 2018. Surveys of middle market business leaders indicated that many companies were not aware of what it would take to implement the changes to systems and procedures brought on by ASC 606.
What have the leaders of public companies learned during the implementation process, and how can these lessons help other entities with an impending deadline at the end of this year?
The impact is on everybody
Although the impact of ASC 606 varies greatly among industries, the new revenue recognition guidance affects every company in some way—if not the timing of revenue recognition then certainly the footnote disclosures. Additionally, many companies have had to adjust their internal processes, controls and systems, in order to properly comply with the new guidance. It also affects more than just the accounting department within a company: Legal, operations, sales and information technology are all often involved in a company’s transition to the new guidance.
There is the potential for negative residual effects: For example, Audit Analytics reported that following the release of its updated adoption numbers, a public company experienced a drop in its stock price, and shortly thereafter the Securities and Exchange Commission started an investigation focused on the company’s accounting of long-term contracts.
But there can be positive effects as well: The guidance related to standalone selling prices, while not entirely a new concept, has caused some leaders to realize operational improvements in pricing their products and services, as they re-examine their pricing policies and procedures. In other cases, companies that were “on the fence” about investing in new or upgraded systems and automating processes have used ASC 606 as a catalyst to effect these organizational changes and improvements. Whether it is aligning the recognition of term licenses more closely with perpetual licenses, or providing for earlier recognition of variable components of the transaction price, the new guidance may give way to new customary business practices. These can increase the flexibility that companies have with their customers as the timing of revenue recognition as a result of applying the new guidance generally better matches the economics of the underlying contract with a customer.
It takes resources
The implementation process can be a massive undertaking requiring more time and effort than most companies realize. Even if the new guidance does not have a significant impact on timing or pattern of revenue recognition, many are surprised at the level of documentation required to adopt the new principles-based guidance. Further, updating processes, such as a company’s internal control program, to conform to the company’s new accounting policies has proven to be very time consuming, especially for public entities subject to Sarbanes-Oxley Act section 404.
Accounting areas affected
One study noted that the most common change resulting from the new guidance was the timing of revenue recognition. Generally, it has been accelerated for companies that formerly concluded that the transaction price was not fixed or determinable. This is also true for those who sold software licenses for which they were unable to establish vendor-specific objective evidence of fair value for the related undelivered elements. Capitalization of costs to obtain a contract (e.g., sales commissions) and incremental costs required to fulfill a contract were also found to be common changes.1
It isn’t straightforward
As CFO magazine points out, ASC 606 forces interpretation of corporate contractual performance obligations as well as the provision of unique goods and services (How do you separate goods and services sold together as packaged deals?).2 The new guidance provides a principles-based approach that means leaders need to make many judgments and estimates. These are required to be disclosed in greater detail, and may be met with skepticism by auditors, regulators and other stakeholders, often with the benefit of hindsight. Company leaders will therefore need people with the knowledge and experience to properly apply this challenging new guidance.
It takes time
RSM’s technical accounting consulting group has assisted many public companies with their implementation of ASC 606. Some of these companies had begun their implementation more than two years prior to their adoption date. The first year alone was dedicated to scoping out the revenue streams, understanding the impact of the guidance on those revenue streams and, in general, planning for the implementation.
