Big deadlines are looming for businesses around the world. Changes in the U.S. and abroad will affect every organization that offers any kind of subscription, from mobile service providers to landscapers to software vendors -- and there’s not a lot of time left to get ready.
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| Pretty much all businesses are trying to increase their revenue. But when they can put that revenue on the books is about to change. |
“While January 2018 may seem far away, the average Fortune 1000 company needs 18 months to prepare for such a sizable change in the revenue recognition process -- a deadline that just passed in June,” SAP’s thack.brown said in Financial Director last week. “For successful compliance, early preparation is paramount.”
These changes revolve around revenue recognition, a standard that tells an organization when exactly it can add a sale to the books. It’s a well-defined accounting principle, but that definition is about to change -- with huge implications for public, private and not-for-profit organizations.
And SAP has a high-tech solution to the problem.
New Rules Offer Harmony
Revenue recognition (a.k.a. revrec) is fairly simple when dealing with many retail exchanges (e.g., when customers pay cash for goods or services that they receive immediately). But revenue recognition can be very complex for organizations that render services over a longer period, such as a subscription; the amount and timing of revenue then depend on many factors.
Yet revenue recognition is critical for regulators, executives and investors who are trying to evaluate an organization’s financial performance. That’s why two accounting standards boards (Financial Accounting Standards Board in the U.S. and the International Accounting Standards Board) are looking to more closely align their guidelines via ASC 606 in the U.S. and IFRS 15.
“The new accounting guidelines are intended to make financial results more transparent and comparable [across all industries], and to harmonize U.S. standards with international standards,” AccountingWEB stated last month. “Companies with even moderately complex customer contracts are going to find that the new rules will have extensive impacts best dealt with by software designed specifically to handle the new requirements.”
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| Revenue recognition -- or revrec -- is a GAAP accounting principle that governs precisely when an organization can account for (or recognize) revenue. |
Technology to the Rescue!
“IFRS 15 is going to come, and we have to adapt to that change,” Türk Telecom Group CFO Murat Kirgöz said in an SAP video about the impending international accounting standard. “To adapt to these changes under a single platform is much easier [and] faster.”
That’s why SAP announced Wednesday its latest enhancements to SAP Revenue Accounting and Reporting (RAR), a platform designed to help CFOs and Chief Accounting Officers master these new and impending accounting standards, as well as existing requirements.
“SAP RAR has been helping our customers solve complicated revenue accounting challenges for more than 16 months, and is available with all releases of SAP S/4HANA Finance and on SAP ERP Financials EhP5 and higher,” SAP’s pete.graham stated in a blog post in July. “It has been built specifically to support customers to enable compliance with IFRS 15 and ASC 606.”
Those are big differentiators for SAP: It developed software specifically to solve this problem; the software works seamlessly with other financial solutions, which users can implement as a suite or one at a time; and SAP will update the software as rules, regulations and interpretations change. Other new features in the SAP RAR v1.2 release include:
- Cost recognition
- Capitalized costs integration with SAP Project Systems and SAP Results Analysis
- Improved contract combination and modification capabilities
- Integration with SAP CRM service & billing scenarios
- Advanced features for transition to the new IFRS 15 and ASC 606 accounting standards
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| Revenue recognition can be very complex for subscription-driven organizations, such as mobile service providers, landscapers, media outlets and software vendors. |
The Clock is Ticking
Companies should begin their preparations for a new revenue recognition standard by understanding the accounting implications, as well as the tools available to them. There’s even work to do after the implementation; many boards and shareholders expect at least two quarters of dual reporting.
“Implementing new revenue recognition software is not a matter of simply sitting down and converting old data to a new system,” diginomica stated last week. “These projects will require configurations, testing, what-if accounting scenarios, creation of allocation rules, maintenance of dual sets of books and many more activities [that] may not be within the accounting background or skill set of many technology personnel or firms.”
This is a lot to get done before Jan. 1, 2018, when public companies must reallocate revenue each time a customer contract changes -- and defer expense recognition to align with the contract’s delivery -- in accordance with ASC 606 and IFRS 15 revenue management guidelines from the FASB and the IASB. Private companies will have until 2019.
To see how much time you have left, check out the IFRS15 / ASC 606 DoomsDay timer. Follow Derek on Twitter: @DKlobucher
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