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Jens Mielke: Revenue Recognition Lessons Learned (So Far)

In my first blog on the topic of the new Revenue Recognition guidance, I shared an overview of what ASU 2014-09 covers and some thoughts around how it will impact companies. Since then, Aventine Hill's Technical Accounting team has been engaged by clients to assist with their initial assessment and adoption process. While still early, some “lessons learned” can be shared to help others who are about to begin the process. As the old advertising saying goes, “your results may vary.” So too may your experiences with Revenue Recognition. Every company is different and even companies in the same industry may have different outcomes.

It’s not too soon to start and waiting is risky

When it was finally issued in 2014, the adoption date for the standard - at the time, 2017 for public companies - seemed a long way off. Few companies even considered beginning an assessment. Then, via an amendment to the standard, we received a one-year deferral. Even better….or so we thought. Suddenly a lot of other projects jumped ahead on our collective accounting department agenda. Now we are just over a year and a half from the required public company adoption date and based on my discussions with many executives, a lot of companies haven’t even started an initial assessment.

One thing that I have learned from talking with client and non-client executives who have begun an assessment is that the process is generally taking longer than originally expected. There are several reasons for this:

  • Internal project team members tend to be pulled off the project to deal with more “immediate” emergencies
  • Gathering and analyzing contracts can be more difficult and time consuming than expected
  • System changes can be very labor intensive and IT personnel may get pulled away as well
  • There can be a tendency to “slow walk” adoption in hopes the due date will be deferred again.

It can be tempting to bet that more timing relief is on the way, especially given the constant stream of amendments and interpretations that are published. However, we at Aventine Hill are seeing initial impact assessment projects take several months before the implementation process even begins. Waiting is looking like a risky bet. And, starting early allows you to gain insights into your business that you may want to change beyond just adopting the standard.

You may find some unexpected things in your customer contracts

When we talk with companies that have begun the adoption process, one startling fact often emerges – companies, especially those that are highly decentralized, often don’t know where their contracts are stored. While some companies have implemented electronic storage for legal documents, many have not. This can mean that hard copies of contracts are filed away in cabinets all over the country or even overseas.

One of the early steps in adoption is identifying your contracts (based on your revenue stream analysis). I highly recommend establishing a policy of having a central repository and using this opportunity to put new policies in place.

Once contracts are located, it is quite common for accounting to find a few surprises in them. Usually these surprises are minor. But there is always a risk that the actual terms in contracts are so different than what was previously assumed there could be an accounting difference. One side benefit to the assessment and adoption process is that companies gain a fresh understanding of what’s in their contracts. Opportunities to improve contract terms for the future may be uncovered.

Yes, you will need to talk to I.T. - Stat!

The new standard is certainly accounting and reporting focused, but in today's’ world we know nothing happens in accounting that doesn’t somehow go “through the system.” The demands of the new standard will undoubtedly require some level of system reconfiguration. This can span from minor tweaking to the installation of new modules or even new software altogether.

System changes require time. Any accountant that has spent a lot of their career working closely with IT can tell you this time is usually measured in months, not days or weeks. Large companies have publicly discussed how IT will be the gating issue for a successful adoption process. The same may apply to smaller companies. My advice: get IT involved now. If you do not have a large IT department to help you analyze what changes are needed and prepare a project budget to commit resources, Aventine Hill's CIO Services can help.

Get to know practical expedients

The new guidance contains many practical expedients that can make post-adoption life much easier.  They offer companies the ability to set policies that can “expedite” the accounting for revenue. An example would be freight and delivery expenses. The guidance allows for companies to make an election treating these charges as incidental. Not performance obligations. Once this election is made, freight would not have to be accounted for in the same manner as the product and this eases some of the accounting burden. The collective use of practical expedients requires some research and work up front, but it can save a lot of effort in the future.

If the accounting doesn’t kill you, the disclosures might

For some companies, the changes to the accounting itself may not be material. But, even companies that don’t see big changes to their financial statements will see big changes to their footnotes. And for many, the newly required disclosures will be tough to produce. For example, quantitative disclosures by major product line, disaggregating revenue as to whether it will recognized at a point in time v. over time, and future revenues to be recognized from existing contracts with unfulfilled performance obligations. Most companies we talk to are not set up to produce these disclosures and some amount of system reconfiguration will be necessary.

What Should You Do Now?

It's the same advice as in my previous blog:

  • Develop an adoption timeline with reasonable milestones
  • Inventory customer contracts
  • Assess your IT systems
  • Take an honest look at your internal and external resources and determine whether or not your team has the bandwidth to get it all done. It’s likely it doesn’t.

We can help

Our Technical Accounting consultants are currently assisting clients in the areas of impact assessment and adoption. Our work includes performing revenue stream analyses, contract reviews utilizing the new standard’s 5-step approach, researching implementation issues, preparing detailed financial evaluations, and advising clients on recommended courses of action.

We would be pleased to help you better understand your Revenue Recognition assessment and adoption challenges.  If you would like to learn more on what this means to your organization, please use our Contact Form or call your nearest Aventine Hill office.

Posted by Jens Mielke, National Partner, Technical Accounting Practice
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