Revenue Recognition Implementation – Beyond the Theory
The goal of FASB’s new revenue recognition standard is to replace industry-specific guidance with a single uniform standard that provides comparability not only across industries but globally as well. As a principles-based standard, it will require a significant amount of judgement and most companies have come to realize the highest costs associated with this standard relate management’s time for review, interpretation and decision-making. Beyond this, however, there is a practical component of implementation related to the accounting software that must be considered. What is the impact of the new standard on our technology and current processes? What will it take to implement beyond the theory?
For example, internal controls are an important topic related to the accounting, reporting and disclosure of revenue. As a company applies the five-step approach for revenue recognition, it is possible that new or modified fraud or financial reporting risks will emerge, which may require new or revised processes or internal controls. A company’s implementation process should involve a review of current controls, an analysis of controls required for the new standard, incorporation of these controls in the accounting software where possible, as well as documentation and testing of their design and operating effectiveness.
In addition, the company must accurately apply the new standard to the data recorded in the system, which may require information to be gathered and tracked differently. This information must then be used by the company to appropriately recognize revenue in the financial statements and provide the required disclosures related to the standard. Companies will be required to develop and test new ways to track data in their accounting software. Unfortunately, most information systems have not been updated to support the new reporting requirements. As such, compliance with the new standard may require the use of both automated and manual systems.
Lastly, the changes required by the new standard may affect the recognition of taxable income, expenses, benefits, and deferrals. Banks, bonding agents, and other users of financial statements may require different or additional reporting. Performance compensation programs, bonus plans, and other similar programs will need to accommodate changes in revenue recognition. While this isn’t an all-inclusive list, the company will need to address these items and others to ensure their system accurately tracks information for all their reporting needs.
After the decision-making process is completed by management, a strategic plan related to the practical components of implementation of the new standard must be developed. To address the impact of the new standard on the accounting software, companies may have to perform system updates, purchase add-ons or other programs, or invest in software development related to the current accounting software. The implementation process may also involve the development of manual systems or the development of interim processes until the current software can be fully updated. In order to determine the most effective and efficient approach, companies should understand what implementation of the new standard means for them, what they would like to get from their accounting system, what the capabilities of the software are, and what the options are. Due to the complexity of the standard, a detailed set of requirements is necessary to make any decision, and testing is paramount. Utilizing experts in the field from all areas, including IT, auditors, tax accountants, and other third-parties, could assist with the transition and decision-making process.
What will it take to implement the new revenue recognition standard? After review of the above, it is clear there is no easy answer. However, consideration of the impact of the standard on the accounting software system is a necessary component and cost of that implementation. Don’t be afraid to ask for help.