Confirmed: New Revenue Recognition Rules Impacting Businesses
As accounting professionals have been predicting, the new revenue recognition standards have forced many companies to change how they do business. Since public companies were required to adopt the new standards in 2017 to be effective January 1, 2018, the after-affects are being shared. A recent Wall Street Journal article highlights several scenarios in which companies have been impacted by ASC 606 and indicates that more than half of the S&P 500 companies have disclosed an impact on their accounting policies.
According to the article, Red Hat, a Raleigh, NC, software-service provider previously tailored pricing for subscription bundles for each customer. Now they have uniform pricing and discounts according to CFO Eric Shander since the new reporting rules require companies to more thoroughly account for the cost of sales, such as discounts. “We’re being much more prescriptive on where you’re placing the discount,” Mr. Shander said. “It will be more standardized.”
It’s no surprise that most companies – public and private – are reporting that the impact of ASC 606 has been broader on both the financial and operational elements of the business than anticipated, including the level of effort and resources to assess, prepare and implement the changes.
As the 2019 deadline approaches for privately held companies, we are now observing a scramble as these companies work to get their ducks in a row before January. Many of our clients are feeling overwhelmed, realizing that they have waited too long and that their internal resources are being stretched.
In certain cases, ASC 606 can benefit companies by enabling them to recognize revenue sooner, but getting there can be painful because new rules affect so many areas of the business – way beyond finance. For example:
- How will it affect your P&L reporting?
- Will your budget need to be adjusted?
- Will you need to make changes or updates your ERP/systems?
- What does this mean for your sales compensation plan?
- Does the legal verbiage in all your contracts need to be amended?
The list of considerations goes on and on. Our advice to privately held companies: Address the new ASC 606 standards now and don’t wait any longer because it is harder than you may think.
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