New revenue recognition guidance means changes for ERP systems
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In May 2014, the Financial Accounting Standards Board and International Accounting Standards Board issued new substantially converged revenue recognition guidance. Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), provides a robust framework for addressing revenue recognition issues and replaces almost all existing revenue recognition guidance in U.S. generally accepted accounting principles (GAAP). While implementing the new guidance will require considerable input and effort from the accounting and finance functions, entities must also be prepared for the impact to enterprise resource planning (ERP) systems with additional necessary system capabilities.
Currently, ASU 2014-09 requires adoption in 2017 for calendar year-end public entities (which includes public business entities and certain nonprofit entities and employee benefit plans), and it requires adoption for all other calendar year-end entities in 2018. However, on April 29, 2015, the FASB issued a proposed ASU that would: (a) defer the effective date of ASU 2014-09 by one year for all entities and (b) allow early adoption for all entities (i.e., both public entities and other entities) as of the original effective date for public entities. Entities should not take a delay in the effective date to mean they can delay their planning for and implementation of the new guidance. Given the significant changes the new guidance will bring about, now is the time to begin planning and focusing on proper implementation of the new guidance and making the necessary changes to processes and systems.
Regardless of whether the full retrospective or cumulative effect transition method is selected, an entity will need to parallel report revenue for a period of time to capture revenue under two different accounting policies (one reflecting legacy GAAP and one reflecting the new guidance). If an existing ERP system does not meet the demands of the new guidance, the entity must consider implementing a new platform or a method of managing existing business applications must be devised.
Key questions that must be asked about the ERP system, provider and platform to make sure they fully meet an entity’s needs with respect to adopting the new guidance include:
- Can the ERP system concurrently determine the amount of revenue to recognize using two different accounting policies (one based on the new guidance and one based on legacy GAAP) and can it capture the results under both policies?
- Does the entity have the proper capabilities on staff to manage the process?