In 2014, the Financial Accounting Standards Board (FASB) rolled out one of the most sweeping and impactful accounting pronouncements in decades with the new revenue recognition standard (i.e., ASC 606). The effective date for most (calendar year) privately-held companies is rapidly approaching – January 2019. The new standard applies to all revenue from contracts with customers, and it will impact nearly every entity with U.S. GAAP financial statements in virtually all industries. The question is: what affects will the new standard have and to what degree? If your company hasn’t started, now is the time to charge full steam ahead.
While the new year may seem far away, businesses have fewer than 19 weeks to prepare. The key lesson learned from implementation of ASC 606 by publicly traded companies (effective January 1, 2018 for most) is that it requires exponentially more time, energy, and effort than originally thought. From our initial work with clients and speaking with industry leaders, we’ve seen that challenges await around every corner when implementing the new 5-step approach to revenue recognition, the core of ASC 606. The new standard requires companies to properly assess the following (not an exhaustive list):
- Defining a contract under ASC 606 – what do you expect to get, and what are you required to do
- Understanding the company’s performance obligation(s) and if they are “distinct” in nature
- What is variable consideration and how does it impact revenue under ASC 606
- How to appropriately allocate revenue amongst multiple performance obligations
- Determining if the company is a principle or agent, and if revenue should be recognized as gross or net, accordingly
- Should revenue be recognized at a point in time, or over time
- When does control of good or service pass to the customer
- What are the required disclosures in the notes to the financial statements
If your company is struggling, or if you haven’t begun the implementation process, don’t panic. Our team at Apple Growth Partners is poised to help. We’ve outlined three action items to do now to begin a successful transition.
Step 1: Assign an ASC 606 implementation project leader
Every great project needs a leader. Designating a point person establishes an in-house subject matter expert who is expected to be familiar with the new standard and have a thorough knowledge of the company’s revenue streams and contracts with customers (including sales orders, P.O.’s, more complex contracts, etc.). This may be an Owner, Officer, CFO/Controller, or other individual, who will take charge of the implementation, with heavy cross-functional assistance from the sales force to shipping, billing to collections, shop floor to C-Suite, and quite possibly outside help from consultants, auditors, bankers, and legal counsel. Time is of the essence.
Step 2: Make a Plan and Establish Milestones
As with any successful project, establishing milestones, complete with target dates and owners, ensures accountability and completion each step of the way. Companies that are successful at ASC 606 implementation focus on two key phases. First, the team completes a thorough detailed analysis of the company’s revenues. This will involve a detailed review of all revenue streams and will include reading and analyzing contracts and other agreements, pricing adjustments, and common business practices. The second key phase is the interpretation of ASC 606, and applying the standard to the company’s revenues, contracts, and business practices. This phase requires research, knowledge, judgment, and documentation. These two phases should be broken down into multiple milestones, and achievement of each requires proper time and resources.
Step 3: Open and Ongoing Dialog with Your Advisors
ASC 606 is a complete re-writing of the accounting standards for revenue recognition, and revenue is very likely the largest number on your company’s financial statements. Navigation of the new standard is not a simple task, but it’s easier with help from certified professionals. Our team of CPAs at Apple Growth Partners is ready to help you with ASC 606 implementation knowledge, experience, and best practices. We can provide guidance to meet your needs, whether you simply need a sounding board, or help keeping your project on track, or more comprehensive consulting and support.
Contact us today to help you get started on ASC 606 – our knowledgeable team is here to help make the implementation a smooth process.