ASC 606, Revenue from Contracts with Customers, introduced a new principles-based 5-step revenue recognition model with the intent to bring consistency, comparability and transparency to financial statements across most industries. While these goals were generally achieved for public companies and others who have already adopted, the adoption and implementation process itself caused, in many cases, significant organizational disruption and process inefficiencies. One of the major lessons learned from those first adopters of ASC 606 was that the time and effort needed to plan for and avoid such disruptions were significantly more than originally anticipated.
Companies adopting the new revenue standard learned very quickly that a “principles” based model is in many ways more challenging than one with defined rules. Pain points for first adopters included difficulty in obtaining necessary data, challenges in building new estimation models, complexity in documenting new judgements and the necessity for implementing significant process changes. Even with effective adoption planning, the years leading up to adoption were at times chaotic for accounting departments attempting to keep their heads above water, in many cases deploying band-aids to existing process to simply comply with ASC 606 in time. The result was financial statements in compliance with US GAAP, but a host of new challenges associated with the use of short-term solutions that were often manual and inefficient. It is clear for most companies that there is still work to do post adoption to operationalize and bring efficiency to the processes impacted by ASC 606.
Many companies are now stepping back to reassess the processes they initially quickly implemented while pushing to be compliant by the adoption deadline. Many are also looking beyond compliance to leverage the opportunity presented by the new standard to drive broader process and organizational efficiencies. Private companies still preparing to adopt can learn a lot from public companies and other early adopters by being proactive and thoughtful about the impacts of ASC 606 and building new processes that are efficient and sustainable.
If your organization is now looking beyond compliance and wants to strategically think about effectively operationalizing ASC 606, a good starting point is to perform a thorough assessment of the Quote-to-Cash (or Order-to-Cash) process. Here are a few recommendations to get you started:
- Automate the contract review process using tools such as MorganFranklin’s Audit Readiness Application – ASC 606 Contract Review Analysis. This tool optimizes the front end process of evaluating the technical accounting for each contract under the new standard by incorporating workflow and internal controls, reducing the risk of not applying US GAAP correctly.
- Identify manual processes that are currently in a spreadsheet, but need to be scalable and determine what can be automated. Examples include inputs to the standalone selling price analysis or commission expense capitalization.
- Assess which tasks are taking too long in your process and system and perform a root cause analysis to identify the source of inefficiency. Examples might include the process to set up new contracts or evaluate contract modifications. (Note: an increased DSO can be a helpful indicator of issues.)
- Determine if further standardization is needed for your contracts and pricing to simplify information flow and accounting determinations, while also driving a more consistent customer experience. Consider whether your company would benefit from a CPQ (configure price quote) system.
- Evaluate the tools in place to equip team members to effectively do their jobs , such as decision trees with common, real-world scenarios to drive faster, consistent and high-quality revenue recognition determinations.
- Perform a risk assessment to assess the adequacy of internal controls given the changes to your revenue accounting process and determine if additional controls are needed to mitigate those risks. For example, many companies are now required to capitalize sales commissions when previously those were expensed. The new process to capitalize and amortize those costs creates several new risks and will require a set of new internal controls to address them.
- Determine whether additional/refreshed training is needed in the accounting and/or sales department so everyone in the organization is aligned around the new systems, processes and controls, including what efficiencies can be created.
Thinking beyond ASC 606 compliance is a strategic opportunity that should be embraced. The assessment of the Quote-to-Cash process will identify gaps and determine actionable items to permanently bridge those gaps. The goal is driving your organization towards a more efficient, high-quality, and accelerated close, freeing up team members to work on more value-added tasks.
To have a deeper conversation on this topic and learn more about how we can help, please contact MorganFranklin Consulting at email@example.com.