What Executives Need to Know About the New Revenue Recognition Standards, Part 3
The new revenue recognition guidelines are coming into effect in 2018. We’ve defined a 3 step approach explaining the process for those of you that are not directly involved.
Step 1: Assessment- By now your team has already performed an initial assessment of your systems, processes and internal controls. This is meant to help understand exactly what information needs to be captured and reported on, and where that may require certain modifications to the current process, system, and/or controls. It will also help to better prepare for the impact it will have on your business.
Step 2: Identifying the impact- In order to fully identify the impact, you will need to locate and organize each customer contract. The new standard calls for a review of each agreement to understand if any modifications need to be made. For example, the performance obligation changes include determining whether or not a good or service needs to be accounted for separately or be combined into one single performance obligation.
Step 3: Taking action
Now that your team has done a full review of your business process you can begin to implement the changes that are required by the new revenue recognition guidelines.
There are two options for this when it comes to an adoption method: a full retrospective or a modified retrospective.
The full retrospective will require the standard to be applied to years 2016, 2017, and 2018.
- You’ll be able to compare financials through the different years
- You’ll have better data for analysts and investor community
- You’ll have a higher volume of data to recast
- You’ll have a harder time obtaining the information
The important thing to remember about the full retrospective is that it is going to be a lot of work. You will have to make sure you have the man power to handle this.
The modified retrospective on the other hand only requires the standard to be applied to existing and future contracts from the effective date of 2018.
- You’ll have fewer data points to recast
- It could be good enough for investors if there is little impact on financials
- You’ll have more work for the first full year of adoption
- You may need some historical data from the years prior that will be formatted differently.
The modified version sounds a lot easier, but cutting corners might not be worth the risk you encounter later on. Are you better off with an easy transition now and painful setbacks in a couple of months? Or maybe doing the hard work now will make the transition a lot smoother in 2018. Whatever you choose make sure you keep in mind that your contracts are the core to every transaction. If you don’t keep track of your contracts on an enterprise level then you could definitely be missing revenue, deadlines or upcoming renewals.
Automation is going to be key whether you choose to go with the full or modified retrospective approach to implementing the new guidelines. Using an enterprise contract management software will enable you to accurately capture all the information from your contracts in minutes instead of days. You will have access to all your contracts and data in one secure platform and you will be able to report on all the data with 100% Contract Certainty. At the end of the day, your bottom line is what matters and that’s not worth the risk.
To get more information on the international revenue recognition guidelines, click here.