Today’s finance professionals must contend with the ever-changing interpretations of complex accounting regulations and must realize that misstatements made in revenue recognition can have serious professional consequences. Smart leaders will learn how to master the complexities of revenue management.
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) finalized the project that converged standards on revenue recognition. Released on May 28th, 2014, the Accounting Standards Update (ASC) 606 and (IFRS) 15, titled Revenue from Contracts with Customers, seeks to convert revenue recognition standards from the traditional risks-and-rewards model to a contract-and-control based approach.
Price, Waterhouse, Coopers provide compelling insight on the path forward, “ Entities will need to consider changes that are necessary to information technology systems, processes, and internal controls to capture new data and address changes in financial reporting.” Additionally noted in the Intacct white paper, Mastering the Complexity of Revenue Management, “Outdated methods of spreadsheets and manual data reconciliation are no longer sufficient to handle the greater complexity and scale of new revenue recognition and management reporting challenges.”
The Five Step Approach to Revenue Recognition
In summary, the new standard states, “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects in exchange for those goods or services.”
Achieving this end requires a sequential five-step approach:
- Identify the contract.
- Identify the performance obligations.
- Determine the transaction price.
- Allocate the price to separate performance obligations.
- Recognize revenue upon completion of performance obligations.
All businesses must follow the new revenue recognition standard beginning on or after Jan. 1, 2017, as it replaces current industry specific guidance. For a smooth transition into using the new laws company leaders must realize:
Spreadsheets are OUT. Financial professional need to take control of the situation by understanding that the methods of old used to track revenue will no longer suffice. Employees waste time and money when businesses fail to upgrade accounting software. Using spreadsheets for the critical revenue-accounting task is a nonstarter. Difficult to build and maintain spreadsheets often contain errors. “Complex revenue recognition spreadsheets are a chief cause of monthly closing delays and revenue leakage.” Additionally, they are not easy to audit and do not provide for the intense security required for such heavily regulated functions.
Internal controls are IN. The Sarbanes-Oxley (SOX) Act -Section (404) requires that management assesses the effectiveness of the company internal controls. SOX requires issuers of financial statements to publish in their annual reports information “concerning the scope, adequacy and effectiveness of the internal control structure and procedures for financial reporting.” Internal control begins with the tone at the top and flows through every process in an enterprise. Keeping internal controls useful for revenue recognition requires a robust system that will keep pace with accounting complexity and new reporting requirements.
Regulations are here to stay. Financial professionals must become familiar with and abide by the laws as if their life depends on them. An over exaggeration maybe? However, their careers do depend on them.
Finance professionals familiar with the breadth and depth of the SEC, FASB, and IASB publications and the prolific nature of the details with-in realize this is but a summary of the significant points. The Intacct white paper, Mastering, the Complexity of Revenue Management, provides extensive details on the new revenue recognition rules. It also details how and why preparation for the implementation of the new guidelines is critical. Get it done before Jan. 1, 2017.
“Intacct cloud accounting solutions are the only systems that let you see your whole business, from every angle, and for every decision you need to make.”
Contact InCloud360 today to see how our team of trusted professionals can design an accounting system with unlimited capacity for growth that will meet the tough issues surrounding the new standards for revenue recognition.