November 26, 2019

Why Private Companies Should Not Procrastinate on Revenue Recognition

By Lucas Walters

As companies enter the final stretch for 2019 and prepare to report year-end results, compliance with the current revenue recognition (ASC 606) standard remains a top priority for finance leaders. This is applicable to public companies that have already adopted the standard, as well as private companies that are preparing to implement the new revenue recognition rule for the first time.

It’s no secret that adopting 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. Given the complexity of the new revenue recognition standard, procrastination is a risky approach for private companies because the work involved can be intense and extremely complex.

Here’s a closer look into what we’re seeing at Bridgepoint from our clients that makes it inadvisable to wait any longer. 

Potential Implications for 2019 Year-to-date Revenue:

  1. If your customer agreements have combined product/service obligations, as well as terms that change over the life of the contract (such as price), it could cause both the amounts and how fast they are recognized to change
  2. Timing differences between cash payments and revenue recognition can trigger significant financing treatment under ASC 606
  3. Any clause that allows for discretionary contract termination can lead to varying effective contract term lengths

A common situation we have faced is that once we delve into contracts, clients are often surprised by what we find, which then changes the way revenue should’ve been recognized in prior months of 2019. This can cause changes to prior months that have already been closed, and financials/metrics that have already been published.

Changes in Accounting for Cost to Acquire Customers

The way that costs to acquire customers is accounted for can also be impacted by ASC 606. For example, if the company’s policy was to treat these as a period expense, we often find that they will have to be capitalized as assets, which requires matching them to revenue recognized over time. Companies may even be required to calculate an average life/customer, which is often not an easy undertaking.

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Complexity Within Footnote Disclosures

Under ASC 606, financial disclosures can be much more extensive (as Starbucks recently discovered). Even if a company decides not to restate prior comparative periods (e.g. modified retrospective approach), they must still include the detailed financial implications on how the adoption of ASC 606 would have affected prior periods in the footnotes. This ensures that financial statement readers can still make an “apples to apples” comparison across financial periods. Recalculating the hypothetical way revenue would’ve been recognized can be quite manual, and therefore a painful exercise to undertake.

ERP Implications for Prior Contracts

If ASC 606 requires future revenue recognition changes for your organization, this could also result in modifications to the way existing sales orders are set up in your ERP system. In our experience, some clients choose to cancel these sales orders and set up new ones. Others prefer to only apply ASC 606 to new sales orders and create spreadsheets to account for all of the historical ones. Either way, it can be a time-consuming exercise to make the necessary changes.

BRINGING IT ALL TOGETHER

This sweeping regulation is the biggest accounting change the business world has seen in over a decade, takes longer than expected, and impacts the entire organization. My advice to privately held companies: address the new ASC 606 standards now and don’t wait any longer because it is harder and more complex than you may think. In fact, our client engagements have ranged between a couple of weeks and six months to fully implement ASC 606. Many of our clients are feeling overwhelmed, realizing that they have waited too long and that their internal resources are being stretched. If you’ve waited this long, we recommend that you move as quickly as possible to prepare for year-end close and reporting. Nobody wants to be dealing with these big changes when you’re already swamped with year-end projects and activities.

NEED ASC 606 EXPERTISE? HERE’S HOW WE CAN HELP

We’re ready to help you transition to the new Revenue Recognition standards with ease. 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. Learn more about our revenue recognition services.

 

 

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About Lucas Walters

Lucas Walters is Director of Bridgepoint’s Financial Consulting practice. He provides financial and operational leadership expertise (CFO services) to Bridgepoint clients, and has extensive experience across multiple executive-level functions, including accounting, finance, HR, IT and facility management. Prior to Bridgepoint, he served as a VP of Finance for a fast-growing Austin startup. Walters earned a Bachelor of Science in Business Administration from Concordia University and a Masters of Business Administration from the University of Texas–Austin. He is a Certified CPA in the state of Texas.

EXPERTISE

  • Finance and Business Management Strategy
  • Financial Controls and Policies
  • Budgeting and Forecasting
  • Management Information System Assessment and Planning
  • Start-up Company Strategies
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