The way a company earns revenue is foundational to its financial success. Therefore, the new accounting guidance for recognizing revenue from contracts with customers is expected to affect all areas of operations and bring sweeping changes to enterprise-wide systems and processes. As the effective date for the new revenue recognition standard draws near, companies should make critical assessments and develop implementation plans as soon as possible to ensure a smooth transition.
IT departments, in particular, should prepare now for the impending changes by evaluating whether their information systems require additional capabilities or capacity to implement the changes needed for compliance with the new rules.
The new standard takes effect for public companies in reporting periods beginning on or after December 15, 2017. Private companies will be expected to abide by the new standard in reporting periods starting on or after December 15, 2018.
Dig into the Multi-Level Impact of Revenue Recognition
Before the new revenue recognition standard aimed to streamline and standardize revenue recognition, the varying industry-specific accounting rules made widespread automation of revenue accounting nearly impossible. As a result, enterprise resource planning (ERP) systems typically have not been designed to perform complex revenue accounting, and they often are supplemented with manual spreadsheets and other supporting software solutions. Now, all of those processes, spreadsheets, and IT systems have to be assessed – and potentially altered or replaced – in preparation for the new guidance. Further, companies will have to make sure their systems can run “old” and “new” revenue accounting methods concurrently to comply with either the full retrospective approach or the modified-retrospective approach, both of which are offered under the new standard.
The full retrospective approach requires companies to apply the standard to each period presented in the financial statement. Under the modified-retrospective approach, companies apply the guidance to only the most current period presented in the financial statement.
Adapt the Foundation
To begin preparing for this pervasive and complex IT planning challenge — and a future environment that better lends itself to revenue accounting automation — IT personnel should learn as much as possible about the new standard. Information and tools provided by the Joint Transition Resource Group for Revenue Recognition can help stakeholders understand and prepare for the systemic impacts.
Next, IT staff should consider the following questions:
- Which systems are linked to material revenue line items and the related footnote disclosures (i.e., what current systems will be affected)?
- Do those systems have the capacity and capability to implement new accounting processes and capture data as required to satisfy the new rules and related footnote disclosures?
- How will data flows around those IT systems change once the new standard is implemented?
- Will settings and queries for data collection and reporting need to be adjusted?
- Will access controls or segregations of duties need to be updated for the IT systems and/or applications?
- Is this accounting change an opportune time to review data security access, backup processes, and recovery capabilities?
Build Your Revenue Recognition Transition Plan with CRI
The answers to the questions above will lay the groundwork for the IT portion of an effective implementation plan for the new revenue recognition standard. Organizations with a concrete plan will be better equipped to accommodate the necessary changes to IT systems, minimize potential IT costs and disruptions associated with adopting the new guidance, and operate efficiently in the post-implementation environment. For additional guidance on how the new rules will affect IT and other areas of your business, please contact your CRI professional. Additionally, be sure to visit CRI’s revenue recognition trending topic page for supplemental resources to help you create a revenue recognition transition plan.