The new year is here, which means the ASC 606 effective date is past due for public companies. Private companies have the luxury of one more year to adopt the new guidance but should not underestimate the timeline for the adoption process and the impact of the new guidance; specifically, just how far reaching the changes in the guidance are in terms of the financial as well as the operational impact they have for companies.
The Impact of ASC 606
ASC 606 at its core is a principle and judgement-based standard as opposed to its predecessor, ASC 605, which was based on a more rigid and rules-based framework, and it eliminates most industry-specific guidance. These changes will have an immediate impact on finance groups, but other groups will be impacted as well. Sales teams will have to consider whether deal structures under ASC 606 will have favorable impacts based on the new guidance. Many companies may consider implementing a revenue system that can automate recognition under ASC 606, which would require significant resources from IT as well as key finance groups.
On the flip side, ASC 606 also presents a new, uniform set of guidance for commissions and requires companies to amortize all costs incurred as part of obtaining and fulfilling contracts, impacting sales operations groups. Obtaining buy-in from all key stakeholders ranging from business team members to C-Suite executives and above will be critical to developing a roadmap for the transition. Many companies may find themselves searching for a clear-cut path to the adoption process, and while there is no one-size-fits-all roadmap, there are key transition considerations all companies should take note of as they embark on their journey to adopting ASC 606.
ASC 606 offers two methods to adopt the new guidance: the Full Retrospective Approach or the Modified Retrospective Approach. Full Retrospective is a complete restatement of the company’s financial data presented in the year of adoption under ASC 606. The modified approach requires no restatement; rather, a single adjusting entry is made to the Retained Earnings on 1/1/2018 to account for the differences in revenue between ASC 605 and ASC 606 for all in-flight contracts on the date of adoption. While the Full Retrospective method will provide investors with the most accurate impact of the new guidance, the efforts to restate data can be cumbersome depending on how well the data has been maintained and may require additional resources to filter through the data, among other considerations. The Modified approach presents a simpler route of no restatement but with a caveat: in the year of adoption, two sets of books will have to be maintained to account for revenue under both 606 as well as 605. In deciding between the two methods to adopt, the question boils down to how material the impact of ASC 606 is to the company.
Many companies currently operate without a designated revenue recognition system, and several operate manually. Given the additional number of estimations and calculations that ASC 606 will require, automation is recommended. Implementing a new system presents several challenges of its own, including identifying the key business requirements, sifting through years of data to migrate to a new system, and ensuring that members of the business adapt to the new system before the adoption date. For companies that decide to automate revenue recognition, getting an early start is critical.
Many public companies are either still in the process of implementing their new revenue recognition systems or have simply run out of them and will have to adopt the new guidance using manual methods. Private companies should take note and start the automation process as soon as possible. From selecting a system that can adapt to the needs of the business, allocating resources to the implementation project, sifting through enormous amounts of data for migration, testing the system, and training business users, the time and dedication required to take the automation from start to finish is a detailed and cumbersome process. When it comes to the automation process, it is never too early to start.
Many companies may want to consider performing a gap analysis, which entails a thorough review of the current revenue accounting policies and operational practices that a company has today and assessing how they will change under ASC 606. C-Suite executives and above as well as auditors will be looking for companies to determine early on the materiality of the new impact, and the gap analysis can provide a baseline framework for the road ahead as well as give estimated dollar amounts to the expected impact. This will allow companies to better determine the transition method to select based on the impact to the company and further assess resourcing and other operational changes that should be made. For companies that choose to automate revenue recognition under ASC 606, the gap analysis will help define the business requirements and pinpoint areas that are in most need of automation.
CallidusCloud offers a complete revenue recognition solution to help make ASC 606 compliance easy. Read more about what to consider when making the move to ASC 606 here.