Take Steps Towards New Revenue Recognition Standards Now

Imagine this – you are a company with hundreds of thousands of customers. As part of doing business, you also have multi-year contracts with each of your customers.

Now imagine planning for the new revenue recognition standards. I know … it’s daunting. I have an audit client who is in this situation, and I’ve been impressed by how much planning will go into their transition. You may not have the clear-cut mandate that my client has, but the new standards are likely to impact your business, too. Have you started planning for the adoption of and transition to the new standards?

If not, you are not alone, but you’ll want to begin planning soon. The worst strategy you could adopt is a “wait-and-see” posture that might require a massive effort late in the game.

Here are some early steps we’d recommend:

Selecting a Transition Method

You’ll need to decide how you will transition from your existing method for recognizing revenue to the new standards. You’ll have a choice of two transition methods:  a full retrospective method and a modified retrospective method. 

Under the full retrospective method, companies will need to restate financial statements to adjust each year presented.   This means companies will need to evaluate each contract with a customer in place during each of the years presented under the new standard to determine the impact to the financial statements. 

Under the modified retrospective method, companies will adjust retained earnings for the impact of the new guidance on the contracts with customers in effect as of the date of implementation.  While the latter approach impacts fewer contracts, the years presented would not be comparative and additional disclosures are required.    

As you consider which method will be best for you, you’ll need to consider what data your stakeholders need in the financials. You’ll also need to understand which method others in your industry are choosing.

Mitigating Impact to IT Systems

New standards may require your information systems to handle more data in more complex ways. After you determine how you plan to transition to the new standards, you’ll need to evaluate your accounting system to ensure it can accurately account for contracts with customers under the new standard. If you are like our client and have thousands of contracts, you may need to invest in new hardware and software or explore new storage options. You will certainly need to include discussions about cybersecurity in your planning.

Starting an IT evaluation early in the process will allow adequate time to modify your system and test it for accuracy.  Some companies that expect to be significantly impacted by the new standard are even considering the possibility of running a new system parallel to their current system for a period of time. Operating dual systems allows you to gather the information and test the transition over time. 

The length of a company’s typical contracts will determine when IT systems will need to be up and running.  If you have contracts that span multiple years, assess your IT status sooner rather than later.

Updating Accounting Processes and Controls

The new standards require significant and sustained judgment.  You’ll need to decide how you will account for specific things, such identifying performance obligations, estimating variable consideration, as well as estimating stand-alone selling prices.  Once you’ve decided how you will handle these types of issues, you’ll need to adapt your procedures and document the changes. You’ll also need to implement internal controls around the new processes to ensure the revenue standard is applied consistently among contracts with similar characteristics.

You might not be anticipating the review of thousands of contracts, but even a smaller number will require thoughtful consideration and planning. Implementation will take significant time and effort, as well.  Planning now will help the transition be a much smoother process.   

Ready to Get Started?

I hope so, but if not, remember that you have a partner in the HORNE PMM team. We can scale our services to meet your needs from consultation to planning to implementation.

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