For some companies, time is running out to meet compliance standards for the new revenue recognition rule issued by the Financial Accounting Standards Board. With public firms left with only a few weeks to fully implement the necessary changes, and a fast-approaching deadline for other firms, it's becoming clear that adopting these new accounting practices could pose risks for more than just the finance department. Unfortunately, it serves as yet another reminder of the outsized impact that inflexible systems and staffing in finance teams can have on the rest of the business
Revenue recognition at a glance
As a refresher, the FASB updated its rules for revenue reporting with an announcement on May 28, 2014. According to its website, the new revenue recognition models are intended to bring FASB rules more in line with those already implemented in accounting standards such as the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS).
"The new rules should make it easier for investors to compare companies."
In the FASB's own words, the primary objective of these new revenue recognition standards is to "recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." In theory, this should make it easier for would-be investors to objectively compare the financials of two or more similar companies.
In practice, it has been a struggle for some businesses to fall in line with the changes. Readers may recall a previous article that cited a Wall Street Journal report on the challenges faced by several firms to whip their finance and IT teams into shape before the clock strikes midnight on the compliance deadline. For applicable public entities, that deadline is Dec. 15, 2017. Organizations considered "nonpublic" by the FASB have until Dec. 15, 2019 to comply. However, since fiscal reporting years vary from calendar dates in many companies, adoption before these deadlines is often required.
Impact beyond accounting teams
According to Deloitte partners Bryan Anderson and Eric Knachel, the net impact of the new revenue recognition requirements will mean more work spent gathering data, analyzing it appropriately and creating the necessary reports from it. In many cases, organizations will need to overhaul their accounting and finance departments to handle more in-depth disclosures and judgment details across a high volume of transactions and multiple accounts. And there are still plenty of questions surrounding many finer details of the new rules.
"Little wonder that many companies are finding that revising accounting processes and controls to support the new standard is a more significant undertaking than originally thought," Anderson and Knachel wrote, perhaps understating their point. They went on to explain how meeting these new accounting rules will inevitably cause a high degree of collateral damage to other departments, increasing workloads, errors and costs throughout a company:
- We already know that IT departments are having difficulty reconfiguring their accounting systems to support the new revenue recognition rules. Specifically, the regulations create a greater need for connectivity between accountants and other departments like sales and marketing.
- There are legal implications to the new rules as well, because they dictate how business contracts should be designed for certain transactions. Legal teams will need to coordinate with finance and accounting to revise these contracts.
- New legal compliance concerns also invite more changes for human resources. Anderson and Knachel offered bonus and compensation arrangements as an example, since these may be tied to revenue and thus might need to be revised to meet the new FASB standard. In general, HR will also need to work with other teams to understand whether they have the staff and budget available to even tackle each of these tasks related to revenue recognition.
We still won't know the full impact of these revenue recognition standards for some time, at least as far as corporate growth and agility are concerned. But what has already been made clear is that CFOs cannot afford to wait any longer before overhauling their finance and accounting practices in a way that actually enables growth. Consero has the tools and expertise to make this happen – learn more about their unique financial solution for CFOs and accounting teams.