Blake Roe, CPA, Partner, Plante Moran
With the New Revenue Recognition Accounting Standard, It Pays to Be Proactive
Although the deadline for implementation of the new revenue recognition accounting standard is a couple of years away for private companies, organizations have already reached a fork in the road. They must decide whether to engage in proactive planning now, or face risky consequences later. Because virtually all revenue transactions, contracts, and customer relationships will be affected, getting on track could take longer than you’d think. It continues to be a hot topic during our conversations with clients. Unlike most other accounting changes, the new standard will influence organizations not just at the financial-statement level, but also at the operational level.
The new standard might affect the presentation of accounts receivable on your balance sheet. If you have a line of credit with a borrowing base related to accounts receivable, this could affect the amount of short-term credit available to your organization. If that’s the case, you might need to meet with your bank to amend your credit agreement. Maybe you also have covenants with that bank. Will you be at risk of violating those covenants as a result of the impact of the revenue recognition changes?
Or consider this:
Compliance with the new standard might require you to re-evaluate how your IT system moves sales orders through the fulfillment process. If configuration changes are necessary, you’ll need to test the system using different variables, re-train your staff, and possibly arrange for third-party auditors to reassess the system. That alone could involve substantial time and monetary investment — but what if software limitations prevent you from making the required changes? Can you count on receiving timely assistance from your vendor? Or — in a worst-case scenario — will you need to switch to a new accounting system entirely?
It’s easy to see why it’s never too early to start planning. But before rushing into several projects at once, organizations should first conduct an evaluation to gauge the level of impact. Start with a broad diagnostic of the people, processes, and technology that will play a role. Organizations can then develop a game plan by prioritizing the actions that should be taken, estimating how much time each step will take, and determining which team members will need to be involved.
It’s appropriate to feel a healthy level of concern when it comes to these implications; but there is a glass-half-full perspective to be had. In implementing a new accounting treatment for contracts with customers, you might decide to restructure those contracts to obtain more favorable terms. If you’ve been thinking about making changes to your ERP system, but haven’t gotten around to implementing them, you might be able to roll them in with configuration updates that will now be necessary for compliance with the new standard. In this light, modifying the way you recognize revenue is not just a task, but an opportunity.
Will implementing the new standard require significant time and strategic thinking? Yes. But in the process, you could uncover solutions for improving your business model in the long run.