December 5, 2017
Spotlight on a Revenue Recognition Assessment
The deadline to comply with the new revenue recognition standard (ASC 606) is here and this sweeping set of regulations may be the biggest accounting change the business world has seen in over a decade. The potential implications of the new standard across all industries go well beyond a few adjustments to accounting practices and processes—it may demand a comprehensive overhaul across all aspects of the business—finance, sales, operations, services and IT. For most organizations, assessing and adopting the new standards will be a complex project that demands significant amounts of time, planning and coordination.
At Bridgepoint, we have some first-hand accounts of clients who have spent several months conducting preliminary impact assessments before the implementation process could even begin. We interviewed our very own David Machazire, one of Bridgepoint’s technical reporting experts, to provide a glimpse into a recent assessment we performed for a public company client.
A Look Inside: ASC 606 Assessment
Lacking the bandwidth and expertise, a public company engaged Bridgepoint to help perform an ASC 606 assessment by the end of their third quarter so auditors would have time to review the proposed plan before the implementation deadline of January 1, 2018. While our client anticipated that the dollar value impact on the financial statements would be immaterial to the users of their financial statements, auditors still required a thorough assessment be performed so they could audit the impact of implementation.
What did your assessment involve and what deliverables did you provide to the company following the assessment?
The purpose of the assessment was to analyze all sales revenue contracts and determine the accounting policy that the company would follow under ASC 606. In addition, we worked to identify areas in which there would be differences in the measurement and timing of revenue recognition, and communicated how those differences would impact the company’s financial statements upon implementation of the new standard.
Key deliverables we provided to company management and their auditors included:
- Scoping analysis
- Project planning memorandum
- A complete and accurate inventory of in-scope contracts with tracker of gaps that will need to be quantified and disclosed
- Detailed ASC 606 technical accounting position whitepapers
- Underlying documentation and detailed checklists that support the “5-steps” accounting conclusions on a contract-by-contract basis
- Comparison of expected to current SOX internal controls with recommended incremental and revised key controls, including ASC 606 implementation controls
What were the first steps in the process – how did you get started?
The initial step was to perform a technical accounting analysis of a sampling of contracts to gain a general sense of key issues, potential complexities and areas of accounting judgments that underlie the contracts. This served as a critical step for effective project scoping and planning. It also provided the foundation for the development of a time budget and identification of appropriate tools and team members to be deployed on the project.
When were the company’s external auditors brought into the conversation regarding ASC 606 and what was their role versus Bridgepoint Consulting’s role?
From the onset of the engagement, we interacted with the external auditors about key decisions related to scoping, project planning and deliverables. We also kept the auditors apprised on our project status and technical findings throughout the project, and received their comments and inputs with respect to draft deliverables and accounting conclusions. This ensured that all efforts were well aligned and the project could move forward effectively.
Did the assessment examine cost components in addition to revenue?
Yes, the new standard addresses costs related to obtaining and fulfilling revenue contracts. Therefore, we considered how facts and circumstances of revenue arrangements impacted the accounting treatment and relevance of such costs, including commissions, marketing and brokerage fees.
How much time does it take to do an assessment?
The duration of an assessment depends on factors including the complexity, uniformity and number of contracts that are deemed to be in-scope, as well as the overall company size and industry. For example, small to medium-sized companies should expect timelines of as little as three weeks to as much as four months, depending on their circumstances. It also depends on the company’s internal resource capabilities and whether a consulting firm is engaged to assist.
After an assessment is completed, is there anything else a company must do for its disclosure purposes?
Yes, the personnel in the accounting function need to be trained on the new disclosures which are more extensive than current GAAP. In addition, changes in internal controls over financial reporting for SOX purposes need to be communicated and assigned to applicable control owners. This will be required for public companies in the first quarter 10Q of 2018.
What was the biggest surprise in doing the assessment?
In this case, management did not have a succinct project plan, nor did they have a designated project manager with the requisite project management and technical accounting skillset. In addition, they had initiated and focused significant time on activities that were not helping to advance the required milestones and deliverables.
Additionally, the client was surprised that the project required the level of effort incurred, given the immaterial effect on the financial statements. They had not fully considered the auditor’s requirement to verify the thoroughness of the implementation efforts to comply with SOX.
What were the recommended next steps for this client?
The collective deliverables from the project were then used to create an implementation roadmap to quantify the dollar value impacts on the financial statements. They were further used to develop implementation and post-implementation processes that contained SOX controls and draft the new revenue recognition policy and disclosure requirements.
Bringing It All Together
It can’t be said enough: the new revenue recognition rules are very complicated. Therefore, it’s crucial to start early and not to underestimate the level of effort involved with assessing and implementing the new revenue recognition standard. Communicating with your auditors to understand their requirements for SOX compliance is important to scoping the project appropriately. Starting early allows you to gain insights into your business that you may want to change beyond just adopting the standard. For instance, if revenue will be recognized on a different basis, do sales commission plans need to be revised? And if sales commission plans need to be revised, what type of lead time is required to roll-out these changes?
As you can see from the example above, even if you believe these new rules will have no material impact on your organization, it will take your team a tremendous amount of time and internal resources to document and support that conclusion. It will also require resources outside the accounting function, such as IT, sales, marketing, operations, HR, etc.
Looking for Revenue Recognition resources and expertise? Here’s how we can help.
Time is running out to comply with the new FASB Revenue Recognition standard. If you’re just starting on your plan to address rev rec or have any questions, I’m happy to chat. At Bridgepoint Consulting, we can help you navigate these changes—from strategy to project management and through implementation—so you can focus on running your business and meet the new standard on schedule. In addition to the legwork, our team can help you get prepared for board and investor questions, help you leverage internal resources to save money and gain internal expertise, and reduce your risks by conducting a proactive evaluation of your systems and design of controls.
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