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Coming up with a game plan for revenue recognition

Consider taking the new revenue recognition rules out for a spin. It could be a short test drive, with just a sample of current contracts sitting in the passenger seat so you can see how the changes feel and how drastic they may or may not be to your company.

The point is to explore the impact of the new rules and determine if any of your processes, systems and contracts need to be adjusted before the rules go into effect. It’s much easier to consider the changes now than when a deadline is staring you in the face. That was the overriding theme of a recent Proformative.com webinar called “Revenue Recognition in 2015: What Your Company Needs to Get Done” with speakers Steve Jackson, a senior consultant at RoseRyan, and Mike O’Brien, General Manager, Financial Management Applications, at FinancialForce.com, a cloud ERP provider on the Salesforce1 Platform.

Changing your view of revenue
It’s been nearly a year since standard-setters released the new rules last May. Since then, companies have, at the very least, digested the literature (if not, it’s time to get cracking!), but what they’ve done next varies. Some have pressed the Financial Accounting Standards Board to make tweaks and give companies more time to adopt the standard while others are moving full speed ahead and are exploring the impacts.

During the Proformative event, several hundred attendees were polled on their plans. Just 15% of the webinar attendees said they have a plan in place to deal with the new rules while 35% said they’re still mulling over the guidance and observing what other companies are doing. “For those of you who are early in the process or don’t know what to do yet, don’t fear, you are not alone,” O’Brien said. “I talk to a lot of customers every day, and some are further down the line, but in fact some companies haven’t fully embraced the standards from a systems perspective.”

As expected with a rule of this size and significance, FASB and the International Accounting Standards Board are hearing about implementation issues and considering whether to clarify anything (most recently, FASB agreed to propose an update that would make clearer how to account for licenses of intellectual property and identify performance obligations).

We’ll all have to stay tuned. Under the current timeline, public companies’ financial statements won’t reflect the changes until 2017 (beginning with reporting periods that start after December 15, 2016; private companies get an extra year). Finance and accounting teams need the time between now and then to get a grip on potential impacts, prepare their systems for the changes, and give investors a head’s up for any shift in financial results.

One way to truly understand the impact? “Go through the motions of closing a month as if the new rules were in effect now,” Jackson suggested. “It’s important that you try to understand the impact so you’ll know what you’re dealing with when building your full plan,” he said.

For those 2017 reports, public companies will be showing three years worth of comparative information, “so activity that is taking place now will be part of the financial presentation” in that first year, Jackson noted.

Where to begin
Jackson recommended viewing the adoption as you would a big tech system upgrade or an acquisition of another company. Like those big projects, you need to do your homework, put a team in place to tackle it and hatch a plan. For some companies, Jackson explained, the work may involve a just few people while others will need to supplement their skillsets with outside resources.

Ideally, the person spearheading the endeavor should have strong project management and communication skills. “As you implement the new standard, your revenue could be different in 2017,” Jackson said. “So as you forecast to shareholders and analysts what you believe revenue and earnings per share are going to be, that needs to be incorporated.”

To get to that point, companies should take these actions:

  • Come up with an overall plan and calendar. Treat it like a big project, which it is.
  • Formulate your team and make sure all other relevant departments are involved. Some companies may need to include sales, IT, human resources (if any compensation plans are tied to revenue), legal, tax, investor relations. Also consider getting other executives, the audit committee and external auditors up to speed with your plans and evaluations.
  • Manage your investor communications. Give outside observers a sense of the potential impact. So far, as required under the new rules, public companies are hinting at how the new standard will affect them. They have either said, in general terms, that it could have a significant impact on their financial statements or won’t have a material impact.
  • Check all your financial systems to see if they can accommodate the changes and what your vendors have planned. “You don’t want to switch on new software the first day of the reporting quarter,” O’Brien said. “If your vendor doesn’t plan to comply or make the application available to you, you need to know now.”

The overall message? It is best to plan ahead. Not every company will be deeply affected by the new changes, but every company should be considering the level of impact at this time.

Watch the replay “Revenue Recognition in 2015: What Your Company Needs to Get Done,” which took place on Proformative.com, a website for senior finance executives.

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