Written by Thack Brown, global head line of business finance, SAP
2018 is fast-approaching, and for corporate finance departments around the world, that means seismic change is just around the corner. New accounting standards are changing the way that corporations perform the all-important function of revenue recognition – and it’s going to have a big impact on your financial statements.
While January 2018 may seem far away, the average Fortune 1000 company needs 18 months to prepare for such a sizable change in the revenue recognition process – a deadline that just passed in June. Despite the final countdown approaching, a recent survey by PwC and the Financial Education Research Foundation (FERF) found that 75% of companies surveyed had yet to fully ascertain how the new standards would affect their financial reporting, a troubling revelation given the investor discomfort and penalties that can be incurred by companies that fail to remain compliant with regulatory standards.
These new standards are among the biggest changes to impact the accounting profession in years. Many companies have been surprised at the length and complexity of the assessment and implementation phases. For successful compliance, early preparation is paramount. If you have not done so already, it’s time to engage.
IFRS 15 implements new five-step methodology and qualitative and quantitative disclosure requirements that increase the level of transparency in revenue recognition reporting. The goal of the change is to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
Given the fact that the old standards were highly industry and transaction-specific in terms of guidance, certain industries, specifically those that possess many multi-year contracts and other sorts of deferred revenue streams, will be more affected by the changes than others. According to the new standards, revenue is recognized when or as an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. As such, this change will have an especially significant impact on the telecomm industry, timeshare companies, or similar businesses that have deferred revenue streams.
Balance Sheet Impact
While the pressure to adopt is certainly top-of-mind for many financial executives, and while all of the attention is on the top line, a very important real impact of the changes that professionals need to be aware of is the impact the standard will have on the balance sheet.
The new standard contains a single, more systematic approach to financial statement presentation, but does not distinguish between different types of contracts with customers. This can be challenging for many companies because how balance sheets are generated is currently very black and white. Since the new standard introduces a lot of gray areas, many corporate finance executives will likely face a bit of confusion as they work through the decision making process to completely re-organize their method of calculating revenue and its subsequent impact on the balance sheet.
This obviously has wide-ranging ramifications, as final earnings will thus not only be reported differently, the timing of those earnings could be completely different as well, which can affect such processes as total cash flow available, which would be an important change for an investor to understand. These changes could also impact taxes for similar reasons, and tax liabilities and should be reviewed carefully for their impact on the bottom line.
Ensuring a smooth transition
In order to meet the demands laid out by these new regulations, corporate finance departments need to consider the following:
- Understand the changes. It’s important that CPAs and finance departments more broadly, take the time to understand the changes to the current GAAP standards.
- Develop a plan for adoption. Understand the transition and adoption of the revenue recognition standard and map out how your company will adopt.
- Find the right tools. CPAs do not have to embark on this endeavor alone. Finance professionals should lean on strong partners that can assist in scaling a large number of transactions. By implementing the right technology and tools, accountants can better ensure a smooth transition that is more effective, efficient and ultimately successful in being compliant.
- Be transparent. Educate all relevant stakeholders about the changes they can expect in the company’s financial statements.
These changes do not have to be a source of frustration for accounting professionals around the world. By starting as soon as possible, understanding the changes and leveraging the right tools to help train staff and streamline the process overall, companies can be confident that they are on the right track towards achieving the goal of long-term regulatory compliance.