Last week I dove into the new IMA® (Institute of Management Accountants) survey and it provided me with an opportunity to reflect on the shift to a more customer-centric economy. This is increasing the regulatory pressure by having more and more revenue based on contracts, as well as on subscription contracts that are subject to the new regulations.
More and more, businesses are looking towards a customer centric model to encourage revenue growth. While this approach is a step in the right direction towards customer retention and company growth, it requires new billing and revenue recognition procedures that accurately track what can be recognized and when – tasks that would be better served by technology more advanced than archaic spreadsheets.
With the shift to a more subscription based economy, regulations have also evolved. As a major innovation for investors and shareholders, the revenue recognition principles are now harmonized between FASB (US GAAP) and IASB (IFRS). However, systems did not keep up with the more advanced reporting requirements and more complex accounting, along with automating the 5 steps of achieving the fair value principle.
The new standards extend far beyond services-only organizations and the IMA survey provides some interesting insights. The challenge is not only about complying with the new standards, it is also about providing “What-If” scenarios analysis to management in order to understand the impact of the new regulations on earnings, taxes and sometimes transfer prices.
To see how finance professionals are being affected by these changes and the shift in the market, we worked with the IMA on a global survey of 6,000 accountants and finance professionals.
CFOs and senior management teams are at a crossroads and must address the major market and regulatory shifts. Below are some findings that stood out:
Companies are at risk of noncompliance with new revenue recognition standards, due to a lack of awareness and assessment.
- 30 percent of respondents recognize that new revenue recognition standards will impact their company somewhat or a great deal.
Given the number of impacted industries in the US, I am surprised of the low percentage and it is likely that some companies may not be fully aware that they are in fact impacted.
Spreadsheets are losing their dominance among accounting tasks due to inability to address complex scenarios and ensure integrity of data.
- Spreadsheets are still the most commonly used method to track revenue recognition (60 percent), but the use of purpose-built ERP apps is a close second (46 percent) and is on the rise with 21 percent currently implementing or planning to implement one.
- Those using ERP apps to track revenue rate the highest overall satisfaction with the integrity of data (40 percent “very satisfied”; 51 percent “somewhat satisfied”).
The abuse of spreadsheets for revenue recognition may likely have contributed to the most frequent cause of the SEC Financial restatements along with delays in closing the books.
Market demand is also leading to the adoption of new billing models, supported by more advanced software and technology.
- The most common trigger of change in revenue recognition methods is the billing model, followed by top management decisions, better software and changes to revenue recognition standards, especially with Multi-Element Arrangements and Subscription based contracts.
Keeping customer retention in mind
In the midst of the “as-a-service” boom, the results of the survey point that it is time to adopt a strong revenue management solution. Customers want billing models that are convenient for them, and an advanced revenue management application will help companies gain a reliable and predictable revenue stream, superior customer reporting and revenue forecasting analytics as well as automate complex accounting requirements.
Systems need to ensure that companies can seamlessly take advantage of the most modern business models and innovation, while staying compliant – almost turning the new regulations into a business opportunity .
To read the full report, click here.