ASC 606 is entering its last phase and organizations can see the end of a strenuous process, but will they start reaping the rewards? The new standard will be effective in the first quarter of 2018 of the calendar-year for public companies and in 2019 for non-public entities. While it is coming close, day one of achieved compliance will also be the first day of a new challenge for many organizations.
Currently, organizations are focusing on the current accounting treatment of revenue. This is rightly so. Yet, the post-compliance future of all organizations – what I call day 366 – also presents a need for ongoing assessment and controls to reassess new revenue streams, changing terms, and new business models. Most organizations have worked hard for ASC 606 compliance; they will probably pass the first audit. The question remains though whether they will also be successful with following audits performed later, after a business change has possibly impacted the principles and assumptions used in the first 606 assessment.
How can organizations design their future processes for success? The dilemma to be answered is that organizations need to prepare to catch and manage future changes as well, not only current ones. To assist with this process, we offer the recommendations below.
3 tips for designing future revenue recognition processes to use after implementing ASC 606
- Use the assumptions defined during 606 contract review for future contract assessment: You can bank on your investment of time and effort during 606 readiness by using the documentation of the items reviewed and your findings in future contract reviews. During 606 readiness, your organization looked at many contracts to assess the impact of these contracts and finalize a position for the new standard. These procedures, which you followed during the contract assessment, can become a continuous assessment baseline for future contracts. This will allow you to identify future contracts that are following a new or different basis and possibly creating a new 606 result because of it. An added benefit of using this assessment baseline is that, as contracts change over time, you can identify when the change begins to happen and adjust accordingly.
- Make contract reviews part of your continuous monitoring process: Once compliant, you can update your process to review contracts on a continuous basis and against the set of facts and assumptions that we highlighted in the prior section. This will allow your organization to monitor and stay ahead of changes to terms and contracts and to reassess proactively any new considerations or revenue-related accounting decisions before they are caught in an audit. In turn, these proactive measures will decrease the probability of future risky audits. There are many different ways to do this, ranging from adding a sales operations team, to having sales reps or contracts reviewers fill out a checklist of questions, to more cutting edge machine learning solutions.
- Treat every new product and business model with the same attention as your 606 preparation: Organizations will continue to launch new products and services and they will try different business models. Many organizations working on 606 preparation already have clear maps of new revenue streams in place. Each of these new products, services and business models should go through the same rigorous review that the existing revenue streams went through during 606 preparation. To be proactive and avoid post-launch surprises, organizations should design contracts and operating procedures in line with the new standard, creating narratives against the five-step 606 framework and making accounting decisions while these new revenue streams are rolling out.
Staying 606 compliant is going to be a continuous effort for growing and changing organizations. As revenue streams, contract terms and business models evolve within the ever changing economy, the principles, assumptions, and accounting treatment of revenue will shift too. To ensure minimal surprises for your organization, you need to make 606 compliance a continuous part of the future state design of your organization, even after the launch of compliance with the new standard. The good news is that you can start planning for the future now, by accounting for that continuous future monitoring now, prior to going live. There are many different successful design possibilities. Consider the options and plan for the future early. In this way, you will ensure that your organization remains compliant on day 366 and beyond.
Principal, Financial Management
T +1 425 214 9821