Revenue Recognition Implementation – Do You Have a Plan?

“We have so much time and so little to do. Strike that, reverse it.”

ROALD DAHL, Charlie and the Great Glass Elevator

It is time.  No more stalling.  No more procrastinating.  The implementation date for the new revenue recognition standard for private companies is fast approaching.  There is no more time to put off the inevitable.  As private companies near the deadline for implementation, it is vital that they begin the complicated process of understanding the specific impact of this new standard on their company and begin to devise a strategic plan for implementation.  And it is equally vital that they understand the costs and time requirements associated with the standard and budget for them accordingly.

There can be no argument that this standard is a principles-based standard.  Because of that, it requires a significant amount of judgement on the part of management, and what that translates to for all companies is time.  For most companies, with a limited amount of resources, competing priorities and a business to run, time is one of their most valuable commodities.  Devising a plan to determine who, how and at what point decisions are made; how best to utilize or allocate the company’s resources toward that goal; and how to implement those decisions, then becomes vital to managing costs associated with this implementation.

Interpreting and making decisions related to this standard and how it affects your company is going to be, by far, the most complicated and most costly component of this implementation.  With so much of the standard open to judgement, this has proven to be a significant challenge for public companies who have already implemented the standard.  However, their challenges and interpretations can provide great insight for private companies.

Contracts must be reviewed in detail to ensure appropriate application of the standard, which can be both tedious and difficult.  Identifying performance obligations, variable consideration and timing will be labor-intensive tasks, and the accounting application will require human intervention.  There is no shortcut to this process.  In today’s world, the sales process may also require on-the-fly changes in bundling, pricing, etc., to continue or create longer-lasting relationships with customers.  This further complicates contract review and application of the standard and requires that contract review continue throughout the life of the company.  This is not a one and done task for most companies.  Additionally, to ensure that accounting policies are applied consistently, very often this process lies with only a single, or a handful of individuals, usually management at a company, further stretching their limited and valuable resources.  Most public companies found it necessary to have a revenue recognition team dedicated to this process.

In addition to the interpretation and decision-making component of implementation, time will have to be dedicated to developing new controls, policies and procedures related to revenue recognition, as well as the related processes.  Once management has determined the affects of the new standard and how they are to be interpreted for their company, they will have to incorporate these decisions into their processes so the system can become more and more automated as time progresses with less management involvement and decision-making.  Not only will the above interpretations have to be applied to the new accounting system, which may require manual, as well as automatic processes, but the company will also have to compile data at year-end for the new financial disclosures.  Depending on the system, this may or not be easily accomplished and may require system updates, add-ons or manual intervention.  These are challenges most public companies are still working on and improving.

The situation is not entirely bleak.  Implementing the new revenue recognition standard may present your company with an opportunity to analyze and improve your current processes, policies and procedures.  Reviewing your contracts for compliance with the standard will allow most to gain a deeper insight into their customers and business and may improve relationships and quality.  Open communication with management, the sales team, accounting department and others within the company during implementation will foster better relationships, understanding and unified goals.  There is value to be gained from the new standard.

Implementing the new revenue recognition standard is no longer a choice.  Devising an implementation plan will not only ease the burden of that fact and ensure a smooth transition but is vital in managing and reducing the costs associated with the implementation.  Time is of the essence.  The remaining timeline for implementation is evaporating quickly.  But, more importantly, a great deal of time will need to be dedicated to the interpretation and implementation of this standard by those that have the least time to spare.  This commitment of time will be our greatest cost associated with the new standard but can also become our greatest asset.  Use it wisely.