The new revenue recognition standard, ASC 606, is said to be one of the largest changes to Generally Accepted Accounting Principles (GAAP) in over a decade. With adoption dates quickly approaching—January 1, 2018, for public companies and December 31, 2019, for all other entities with calendar year-ends—the importance of planning and taking action cannot be stressed enough. In the words of Will Rogers, “Even if you are on the right track, you will get run over if you just sit there.
Although the Financial Accounting Standards Board (FASB) provided organizations almost five years to prepare for ACS 606 adoption, many still have done nothing. This is reminiscent of the enactment of the Sarbanes Oxley Act (SOX) in July 2002, which led to a number of organizations missing the 2004 adoption date because they underestimated the amount of expertise, available resources, and time required to properly plan and implement the standard.
The Clock Is Ticking
ASC 606 is not just an accounting exercise. It will most likely also impact IT systems, human resources policies, sales and marketing, operations, and more. Because of the broad-reaching effects, implementations can take anywhere from a few weeks to several months depending on the complexities related to an organization’s types of revenue streams, business jurisdictions, contract structure, and current processes and internal controls.
We are already witnessing the ramifications of untimely and/or poor planning in those companies required to adopt ASC 606 by the first quarter of 2018. Many of these organizations underestimated the efforts required and believed that either they could handle implementation efforts internally or they had plenty of time to hire outside resources. As a result, many are now scrambling to find outside resources to assist them, and as the deadline draws nearer, those resources are becoming harder to find, are more expensive, and will no longer guarantee they will meet adoption deadlines.
In addition, some organizations that have completed the assessment phase are now coming to the harsh realization that they lack the systems, policies, procedures, and internal controls to produce the data needed to report on a retrospective basis. This especially holds true for those organizations facing significant changes to identified performance obligations (units of account), timing of revenue recognition, and capitalization of contract costs—not to mention the fact that all organizations must face expanded footnote disclosure requirements.
And with the adoption deadline for the new rules on lease accounting, ASU 2016-02, Leases (Topic 842), right around the corner—January 1, 2019, for public companies and December 31, 2020, for private companies—time may no longer be on your side.
For public companies unable to adopt the standard on time, this could result in untimely first quarter filings and SEC sanctions. In addition, for both public and private companies issuing audited financial statements, it may result in a qualified, adverse, or disclaimer of opinion and communication of material weaknesses, all of which can lead to negative impacts on stakeholder confidence in the organization’s financial reporting system and company value.
Enter Project Management
To ensure a timely and successful adoption of ASC 606, organizations will need to incorporate project management principles in their implementation process and include effective change management.
The first step is to identify a project manager. In this case, it should be someone with the right balance of business acumen, strong communication skills, and technical experience (i.e., a working knowledge of GAAP) to help drive effective and efficient change. The project manager can come from within the organization—a CFO or director of finance for instance—or if the organization does not have the internal resources, it can be a consultant such as your outside accounting firm. Once identified, the project manager will be responsible for coordinating the four basic elements of an ASC 606 project: scope, resources, time, and money, with scope being the most important element.
A project timeline outlining the phases and related goals of the project scope can be a powerful tool to keep everyone on track. Project goals define what needs to be done. A documented timeline paints a clear picture of the deliverable, resource assigned, and deadline. A typical ASC 606 timeline may include the following phases:
- Planning – Determine project goals and estimate time and resource requirements.
- Assessment – Determine impact to existing reporting, processes, controls, and systems.
- Design – Create new or modify existing processes, controls, and systems to comply with new requirements.
- Implementation – Reconfigure systems, processes and controls, and communication and training.
- Conversion – Go live, monitor, test, and adjust.
Are You on the Right Track?
Now’s the time, and it all starts with step one, planning. If organizations fail to plan, they plan to fail. And as stated earlier, even if planning puts you on the right track, your organization may still get run over if it doesn’t move through to assessment, design, implementation, and conversion. Get going!
Need help? Wipfli professionals are well versed in the new standard and are ready to assist your organization in any part of the process. For more information on how Wipfli can help with your ASC 606 implementation, contact your Wipfli relationship executive.