All companies track and report revenue. Organizations worldwide will need to start complying with new regulations for revenue accounting that have been approved by the FASB and the IASB. This will be a very big change for many companies both public and private.
The burning question is, “What are the best practices to help your organization become ready to meet the approved revenue accounting standards?”
SAP has been building accounting software for many years and has a very thorough process for tracking new accounting standards changes around the world. Here are five things we have learned on approaching the new revenue accounting standards:
1. Use an iterative approach
The timing and nature of the new revenue accounting standards have yielded a very interesting observation among the involved companies. Those companies taking an iterative approach are making better progress than those taking the “big bang” approach. So, this has led us to the conclusion that this is not a “big bang” project. To be successful, organizations will need to work in iterations across accounting, technology (systems), and people (processes). So, for example, as the accounting teams are working on the technical accounting requirements, the IT teams can be working on portions of the systems based on requirements that are defined to date, and the business owner can be working on identifying the additional new business processes not already defined.
2. Learn new accounting standards now
The new revenue recognition standard will have an effective date of January 1, 2017 for most companies in all industries. The new revenue recognition standard will dramatically change the process of revenue recognition. The upcoming five-step process for revenue recognition must be followed and is a brand new accounting process. So, start preparing now for this standard – it will affect all industries, not just high technology which currently already uses some aspects of the new regulations.
As shown in the picture below, the technical accounting assessment has to be done in advance of implementing any systems. Customers have asked us to provide software, but when they don’t yet have the accounting and parallel reporting requirements finalized, they end up not being able to implement the software. And as explained in #1, this technical accounting assessment will probably be broken down into smaller work segments and iterated with other IT systems and business process work streams.
So our recommendation is to start training your revenue recognition personnel now on the new standard. From my experience, it takes an US GAAP trained accountant about 6-12 months to really get comfortable with an IFRS like standard (i.e. principles based) such as the new revenue accounting standard. We also recommend using an accounting advisor to help accelerate this process as well as provide your organization with a broader set of experience.
3. Excellent collaboration among the stakeholders for a pre-release implementation: IT Corp Fin, Audit
The nature of adopting this new standard is iterative as explained in item 1. In order for companies to successfully navigate the activities and tasks needed to be successful, excellent teamwork and collaboration is needed across IT, corporate finance, and the accounting advisor. We cannot stress this point enough. Teams should be co-located as much as possible with regular check points. Individual teams will of course have to work on certain activities independently, but usually not for very long. The teams will frequently have to communicate their results to the other team members so that the whole team can make progress on the overall project.
4. Technical accounting assessment has to be completed in advance
We have had several customers ask for a software solution only to realize that their requirements were’ntt mature enough for a successful software implementation. This brings us to recommendation number 4. The new standard has to be understood and transformed into requirements before any IT system improvements can be made. As noted in item 1, this will probably occur in an iterative approach, and as noted in item 2, an accounting advisor can help accelerate this process.Moving forward organizations will be required to capture key data from all sales contracts related to revenue with a customer.
Revenue recognition, however, can be extremely fluid, especially as contract terms get amended or new performance obligations are added. Judgments and estimates will require periodic updating.Companies can use SAP Lease Administration by Nakisa to help with recording of the technical accounting assessment. SAP Lease Administration by Nakisa has been built from the ground up to abstract accounting contracts for regulatory compliance needs and contract portfolio visibility. SAP Lease Administration was recently updated for the new revenue standard so it can act as your single source of truth for all contract attributes including the upcoming five steps for revenue contracts. The result is a global view of revenue contract data in digital format – with all the insight you need to quickly identify the impact on financial statements. It also provides an audit trail on decisions made regarding applying the new five-step process to specific revenue contracts.
5. Impacts on parallel reporting and financial close.
We have had some customers figure out the technical accounting assessments of the new standard, but then they didn’t have a clear parallel reporting strategy completed. Now, there is some dependency between the two, meaning, choices under the new standard may impact your parallel accounting strategy. But, companies need to be aware of how these choices impact their parallel accounting strategy and consider various options as part of their overall planning. Our recommendation is to include the parallel reporting considerations and potential impacts up front as soon as possible during your project.
The new standards for revenue recognition are being considered as the biggest accounting change in years. For a smooth transition, early preparation is not only recommended by experts, but crucial for successful compliance.
Start considering your process early to ensure your accounting team can hit the ground running come January 2017.
For more information on how SAP can help, download the whitepaper, “Getting smart about revenue recognition and lease accounting.”