Tips, lessons learned and what you need to know for implementing the new revenue guidance.
As the effective date for the new revenue guidance in ASC 606, Revenue from Contracts with Customers, quickly approaches for many private companies (January 1, 2019 for calendar-year companies), management and audit committee members are faced with many questions.
- What lessons have been learned from public companies’ implementation of the new revenue standard?
- What will my auditor be looking for?
- Where do we start?
“Even companies that are not expecting a material change in revenue must undergo an exercise to identify gaps between existing accounting and ASC 606, determine if any changes need to be made (including system changes), implement the changes, and document the analysis for the external auditors. This process can be time-consuming and require significant effort.”
Daryl Buck, National Managing Partner
Accounting Advisory Services
What lessons have been learned? As public companies are in the process of finalizing their ASC606 implementations, we can share some “lessons learned” from observing the implementation process and interviewing those overseeing the implementation process.
Get the right people involved, earlier rather than later
Because of the pervasive effect of the new guidance on an organization, management must identify the right stakeholders to provide input into the implementation process. Not only does a company need to identify the right people within the organization to provide input (sales teams, IT, tax), but a company should not hesitate to engage external professionals where assistance is needed (training, technical accounting expertise, IT changes, etc.). Getting the right team in place from the start is key to a successful implementation.
Do not underestimate the effort required to inventory contracts
One of the first implementation tasks for many companies is to inventory their existing revenue contracts, identify standard terms and conditions, then determine if any contracts deviate from those standard terms. For companies that allow sales teams to deviate from standard contract wording, this process can be time consuming and require extensive communication and coordination.
Allow extra time for key contract terms
The new revenue guidance requires companies to evaluate their existing arrangements against the new five-step revenue model. This analysis may be straightforward for some contracts, but if your contracts include any of the following provisions, plan to spend extra effort and time to address these provisions and document your analysis:
1. Multiple goods or services — Performance obligations are the unit of account for applying the new revenue standard, so determining the appropriate performance obligations in a contract is critical to how a company will recognize revenue. The criteria for identifying performance obligations are new and therefore companies need to take a fresh look at their goods and services and assess them against the new criteria.
2. Variable consideration (meaning any consideration that causes the transaction price to vary) such as retrospective volume discounts, rebates, bonuses, or penalties — The new revenue standard generally requires companies to estimate these amounts for purposes of determining the transaction price and evaluate whether to constrain the amount of estimated variable consideration to ensure that revenue is recognized only to the extent it is probable that a significant reversal in cumulative revenue recognized for the contract will not occur when the uncertainty is resolved.
3. Material rights (for example, a prospective volume discount that is incremental to the range of discounts typically given to a particular class of customer in a geographical area or market) — Under the new model, a company must account for a material right as a separate performance obligation and this may require a complex accounting exercise to allocate a portion of the overall transaction price to the material right performance obligation.
4. Modifications — ASC 606 includes prescriptive new guidance for modifications and this has necessitated some companies to implement system solutions to track and account for these modifications.
5. Contract costs — The new revenue standard introduces guidance for costs incurred from a contract with a customer, which has been codified in ASC 340-40. Companies are required to capitalize certain costs under this new guidance and therefore companies that may have elected to expense certain costs in the past may experience a change under the new guidance.
6. Customized goods — Companies that produce customized goods and have an enforceable right to payment for work completed to date may experience a change in accounting as the new guidance requires the company to recognize revenue as it performs the work, that is, over time (rather than at a point in time).
Do not forget about disclosures
Private companies may be spared from some of the new, extensive disclosure requirements that public companies have to comply with, but private company disclosures will still require significant time and effort. Private companies must disclose disaggregated revenue information, information about performance obligations, and significant judgments in determining the timing of satisfying performance obligations and in estimating variable consideration.
Read Part 2 of this blog series addressing audit requirements and considerations.
Want to learn more about how ASC 606 can affect your organization? Cullen Walsh, Partner, Accounting Advisory Services at Grant Thornton and Walt Williams, Director of Revenue Optimization and Strategy at Quadax, presented, “ASC 606 - Lessons Learned and What You Need to Know.” Watch on-demand.
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