After years of preparation and anticipation, most public companies adopted the new revenue standard at the beginning of 2018. Now the race is on for private companies and many not-for-profit organizations to implement the standard in 2019.
Adopting the new revenue standard – ASC 606 – was not a straightforward exercise for many public companies. Regardless of the size, complexity, or sophistication of an organization, the new revenue standard presented challenges. Some public companies had material changes to the timing of revenue recognition. Most had increases in disclosures about revenue. Nearly all had changes to processes and internal controls.
Private companies and not-for-profit organizations can learn valuable lessons from the revenue implementation experiences of public companies and the firms that advised them, like Grant Thornton. Three key lessons:
- The new revenue recognition standard can be complex
ASC 606 introduces a five-step, principles-based approach to recognizing revenue. The new standard eliminates industry-specific guidance in favor of an overarching model for all organizations to apply. It also adds guidance in areas for which there was none in the past. Application of ASC 606 requires the use of new judgements and estimates and disclosure about those items.
While a five-step model to recognize revenue sounds simple, applying the guidance is more complex than most organizations anticipated. There is no substitute for rolling up your sleeves and analyzing how the guidance applies to your organization’s contracts.
- Implementing ASC 606 takes longer than expected and impacts the entire organization
Where are the revenue contracts located? How are contracts with customers negotiated and approved? What custom terms can the sales team provide to customers? Are there any agreements with “one-off” terms for important customers? Those questions are important to appropriate application of ASC 606 and are not questions that the accounting and finance function should answer in isolation.
Successful implementation requires buy-in from all parts of the organization, including sales, IT, legal, HR and operational functions. Mobilizing a team, getting buy-in from leadership, and controlling the flow of data and questions is critical. Changes in the top line can impact budgets and trends and likely will be noticed by the C-Suite, board of directors, lenders, and shareholders. Understanding and communicating the expected impact from ASC 606 as soon as possible is imperative to prevent surprises among management, the board, and external stakeholders.
- Don’t assume you’ll have no changes
The simplest scenario – no change to revenue recognition – is not a foregone conclusion and should not be the starting point. An organization should identify its revenue streams, evaluate its contracts, draw reasonable and supportable conclusions, and document the process and conclusions. Some public companies were surprised to find revenue recognition changes hiding in the weeds of the new guidance and private companies and not-for-profits should expect some changes.
ASC 606 is a significant shift in revenue accounting. The principles-based model aims to increase consistency and reduce gaps in existing guidance. However, the implementation process will be a significant effort for private companies and not-for-profits. If you are not already deep into the implementation process, you should get started as soon as possible. Adopting ASC 606 will be more effort than expected and time is running out.
Grant Thornton’s experienced revenue implementation team would be happy to have a conversation with you about your individual circumstances. Feel free to reach out to one of our professionals.
Partner, Accounting Advisory Services
: +1 212 624 5313
National Managing Partner, Accounting Advisory Services
: +1 918 877 0824
Principal, Financial Management
: +1 425 214 9821