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Revenue Recognition Changes: Operational Impacts

by | Oct 6, 2015

Financial Management to Be Thankful ForIn the last article, we discussed what kind of accounting changes are happening relative to revenue recognition and introduced a new term: performance obligations. We also discussed how performance obligations are something new and for a number of industries will not be the same as existing sales order lines items or existing products or services.

With performance obligations being the new “thing” driving revenue recognition, there will be significant changes in most company’s operational processes. Product and service definitions will need to be reevaluated in an effort to create the right performance obligations for revenue recognition.  Pricing will now need to be based on performance obligations and thus the re-defined products and services. The way sales orders are constructed will be changed.  If you are in a service business, the way progress on services is measured and thus the timing of when you will recognize revenue will change.  Because the timing of revenue recognition will change, as well as the definition of products and services, the way sales people are compensated will be impacted.

So these accounting changes will impact the following departments in a business: sales, HR, order management, pricing, product management, finance/accounting, contract management, and service delivery. In every one of these departments, existing business processes and policies need to be evaluated, designed to address the new revenue recognition rules and cascading impacts, and implemented by the end of 2016. For most businesses, these business process changes will in turn drive changes in the way their Finance, ERP, and/or CRM systems are implemented. The software will at a minimum require master file and other data changes and configuration changes in the way transactions are processed. Depending on how your systems have been implemented, there may be programming changes required as well. In some cases, with older or heavily modified systems, the systems will need to be replaced all together.

Considering the time required to evaluate a number of existing processes and policies, design and implement the process and policy changes, change or implement new systems and train your employees on the new processes, policies, and systems, a little over a year is not much time to react.

With the end of 2016 deadline looming, consider your business needs and the time you have to react and become compliant. Since you have to open up a number of your processes and policies to deal with the revenue recognition requirements, it’s a good time to make fundamental business improvements in your process efficiency and process effectiveness. Why not get more than just compliance out of your need for process change. Why not get real business benefit as well.

In addition, it’s also time to seriously consider your investment in technology. More changes like this revenue recognition change are looming on the horizon. If you want a response business model you need responsive technology. Consider whether it’s time to invest in a modern, flexible, and scalable ERP solution.