Good news for companies getting a late start preparing for the new Financial Accounting Standards Board (FASB) revenue recognition rules. As we predicted, the effective date for the new rules has been pushed back a year. The new rules will now apply to reporting periods beginning after December 15, 2018.
Although the effective date has been pushed back, there’s a lot of work to be done between now and then (a prime reason why the effective date is being delayed!). Protiviti launched the Revenue Recognition webinar series in November last year, to help organizations understand what needs to be done well ahead of the deadline. In this series, we continue to work through the Six Elements of Infrastructure, delineating the probable impacts of the transition process in each area. The fourth installment of this five-part webinar series — Systems, Data, Reporting and a Transparent Audit Trail — was held on May 21.
Below, Siamak Razmazma, Managing Director of IT Consulting at Protiviti and one of the webinar speakers, answers some of the top questions raised by webinar participants:
Q: Can my core ERP system properly account for revenue under the new rules, or do I need a dedicated revenue recognition solution?
A: Most likely you’ll need a dedicated solution. Core ERP systems are transactional. When you sell a product or service and generate an invoice, the transaction is recorded in accounts receivable. When you receive a payment, it is posted against that invoice. Invoice and payment.
The accounting for how a customer payment transitions across the balance sheet from liability (advance payment received) to asset (revenue earned), is a separate process requiring its own tracking. For revenue recognition purposes, a payment received is an obligation to perform some contractual task. An advance payment, therefore, is a liability. It doesn’t become revenue until the obligation is met. The new FASB rules are designed to better align revenue recognition on the books with the underlying contractual obligation and the risks associated with it — manufacturing costs, cash flow, etc. Those obligations are defined by contracts and may involve several sales orders or transactions over time.
Combinations of sales transactions over time, or other criteria — such as risk — are totally unknown to the core ERP accounts receivable application. Revenue recognition requires an entirely separate sub-ledger, with a different architecture, capable of applying the appropriate criteria to record complex transactions.
Q: How do companies monitor compliance with revenue recognition rules when their ERP systems lack the capabilities to do so systematically?
A: There are several revenue recognition applications — both third-party and ERP-integrated. A lot of companies, especially smaller ones, use Excel or some kind of homegrown database. These do-it-yourself solutions may work for isolated cases, but if your company does any kind of volume at all, an automated solution is really the only way to achieve consistency, efficiency, transparency and data integrity.
Every calculation should be able to be tracked and the entire process should be transparent. Automated tools allow these things to happen at a fraction of the time that a manual audit requires. A single transaction that might take 30 or 40 hours to track manually only takes an hour with a revenue tracking application and automated reporting tools. When you consider an audit that takes 100 hours to perform with automated tools, you can imagine the enormous amount of time and cost saved.
Q: What are some third-party applications created for the new revenue recognition process?
A: Some of the more popular third-party applications include RevPro, RevStream,
and Softrax. A few ERP systems, including Oracle, NetSuite and Intacct, have integrated revenue recognition applications, and Microsoft has integrated a certified third-party application into Dynamics AX.
Q: When is the right time for companies to start elaborating their system strategy and related design to support the revenue recognition process?
A: The sooner the better, and strategy and design should develop simultaneously. Developing a strategy in the absence of system capabilities could lead to costly workarounds. The best way forward is to become familiar with the various revenue recognition solutions on the market and develop a compliance strategy that leverages existing capabilities as much as possible.
The final webinar in our Revenue Recognition series, which looks at the industry and cross-functional implications of the new rules, is scheduled for July 23 at 11:00 a.m. CST (12:00 noon EST). You can register here.
Here are the links to our previous webinars: