asc 606

The CIO’s Role in the Supporting a New Revenue Recognition Standard

The CIO’s Role in the Supporting a New Revenue Recognition Standard

Excerpts from the article by Mark Davis and David Pierce on Information Week

On January 1, 2019, private companies with calendar-year annual reporting periods will need to comply with Financial Accounting Standard Board (FASB) Accounting Standard Codification (ASC) 606: Revenue from Contracts with Customers (ASC 606 or the New Revenue Standard). The New Revenue Standard replaces the existing revenue recognition guidance (including industry-specific guidance) with a single revenue recognition model intended to reduce complexity and increase financial statement comparability across companies and industries.

While many view the adoption of ASC 606 to be primarily an accounting exercise, the adoption of the new standard has far-reaching impacts within an organization beyond just the accounting function. All functions within an entity, including the chief information officer, should be involved in order to successfully implement the standard.

Why should CIOs care? Because CIOs and their IT departments serve a critical, strategic role in the compliance process. Publicly traded companies with calendar-year ends became subject to the standard in January 2018. In many of those implementations, CIOs and their teams had to significantly retool how their companies collect and process financial data.

Private company CIOs are likely to face similar challenges. Many may need to design new IT systems and data management protocols or implement new financial systems to aggregate, analyze, and extrapolate financial data. This is not only to comply with the new standard, but also to address risk of possible financial impacts and friction with external relationships, such as with vendors, lenders, and investors.

To advance the process of implementation, CIOs may benefit from considering the following:

Five considerations

1. It’s not just about the tool. Some organizations may focus their early efforts on choosing a revenue recognition engine, an important consideration, but not the only one. Companies also need to establish a master data management framework for a broad range of data types. Clarity in product hierarchies and definitions will be important to establish standalone selling prices required by the standard. Data quality issues are ever-present, and incomplete or inaccurate data often results from insufficient controls on existing systems. Staffing the implementation team with IT personnel is also important.

2. Finance and IT aren’t the only players. The New Revenue Standard will impact other parts of the organization, from sales to legal to human resources. For example, sales compensation may need to change. CIOs have a unique opportunity to unite disparate parts of the organization, both to establish IT’s relationship with other teams involved in the implementation and to help those parties understand their own roles.

3. Data and analytics loom large. Two types of issues that can arise around data and analytics are first, integration and preparation of data for the revenue engine itself; the strict interface protocols of revenue recognition engines require that data be loaded in a specific format, and second, the significant reporting and reconciliation requirements under ASC 606. It’s imperative that upstream transactional data, such as from billing systems, makes it into and through the engine.

4. Other upstream system issues warrant attention. Ordering and billing systems may not adequately capture data for compliance with ASC 606. For example, some information required for revenue recognition might be in a quote while other information might be on the order. It’s critical that independent data sets be accurately linked.

5. Opportunities accompany the challenges. Sometimes organizations are not eager to spend money on compliance, but there are potential ways to ease the pain. Automation can streamline existing processes or generate data that can improve pricing, increase profitability, and create new value-added services.

Read the full article on Information Week

Verizon Reports Impacts From Accounting Change, Tax Cuts And Jobs Act

Excerpts from an article on Nasdaq.com

Verizon announced it has implemented ASU 2014-09, Revenue from Contracts with Customers (ASC 606) on January 1, 2018 using the modified retrospective method for open contracts. The company said the adoption of the new standard will have a significant impact on its 2018 operating results. During the first quarter of 2018, the Group will record a cumulative adjustment to retained earnings which is primarily related to two items: net contract assets arising from open wireless subsidy contracts, and deferred commission costs.

For full year 2018, the company estimates the overall impact from the opening balance sheet adjustment and the ongoing impact from new contracts to result in an insignificant change to consolidated revenue. The revenue change is primarily related to an expected decrease in wireless service revenue offset by an expected increase in wireless equipment revenue. The company estimates a net decrease to operating expenses primarily related to wireless and wireline commission expense. In the aggregate, these items are expected to yield an estimated benefit to full year 2018 consolidated operating income. On opening balance sheet impact, the company estimates pretax retained earnings increase to be in the range of $4.0 – $4.6 billion. The company said the accretive benefit to operating income anticipated in 2018 is expected to moderate in 2019 and become insignificant in 2020.

Read the full article on Nasdaq.com

Performance tracking and finance management

ASC 606, Revenue From Contracts With Customers, was issued jointly by the FASB and IASB on May 28, 2014. It was originally effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016, for public entities. Early application was not permitted (however, early adoption was optional for entities reporting under IFRSs). On August 12, 2015, the FASB issued an ASU, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date, which deferred for one year the effective date of the new revenue standard for public and nonpublic entities reporting under U.S. GAAP. Therefore, for public business entities, certain not-for-profit entities, and certain employee benefit plans, the effective date for ASC 606 is annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017.

The effective dates of the new ASC606 and IFRS15 accounting standards are looming, in turn renewing the emphasis on revenue recognition and finance management. Financial metrics must be forward-looking and report on:

  • customers, not units;
  • lifetime value, not average selling price;
  • recurring profit margins, not annual gross revenue;
  • renewal rates, not close rates;

These metrics differ but do not always map to those configured in an enterprise general ledger (GL) system. CFO's may require access to detailed key performance indicators and reports directly from the billing solution itself — relying on it as a "second tier" to incumbent ERP and GL systems. As a result, the Billing System becomes an extension, subledger, of the General Ledger and necessitates the need for finance and billing to be tightly coupled.

Sources:

  1. https://www.iasplus.com/en-us/standards/fasb/revenue/asc606

Revenue Recognition Standard, ASC 606

Revenue Recognition Standard, ASC 606

The FASB and IASB issued their converged standard on revenue recognition in May 2014. The standard provides a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies and industries and significantly reduce the complexity inherent in today's revenue recognition guidance.