Rev Rec checklist: Your transition to the new ASC 606/IFRS 15 standards
The new revenue recognition rules ASC 606 and IFRS 15 go into effect January 2018 for public companies (and January 2019 for private firms), triggering major material changes in how businesses must record transactions. How prepared are you?
Finance leaders need to know the new rules inside and out—and their implications on the business. No matter how far you are down the path to compliance, below is a checklist of what you need to consider and do for a successful changeover.
- Assess impact.
Evaluate your primary revenue streams and key contracts. Identify the revenue recognition changes required and business units where these changes may have the greatest impact.
- Evaluate effort.
Determine how heavy will the lift be, both during the transition and on a continued basis. Do you need to bring on an outside consultant, or expand your full-time staff permanently?
- Build a detailed plan.
Once you complete steps one and two, it’s imperative you build a detailed plan with project scope, required resources, budget, timeline, and deadlines along the way.
- Determine contract evaluation requirements.
Develop a new rules-based framework for your accounting policies based on the assessment of your contracts. Assign a team to thoroughly evaluate each one and draft new policies accordingly.
- Choose transition method.
Will you go full retrospective or modified retrospective method? Each has pros and cons, but both require significant implementation efforts. The full retrospective method requires restatement of the prior two comparative years (possibly three), while the modified retrospective method requires dual record keeping during the adoption year.
- Address comprehensive disclosures.
The new standards’ requirements for quantitative and qualitative disclosures are significantly more expansive. Create a method for systematically gathering, reviewing, and disclosing information about remaining performance obligations, e.g, resources consumed, labor hours expended, costs incurred, or machine hours used.
- Track performance obligations.
Track your performance obligations against each unique contract and apply your new revenue calculation rules. Determine how much manpower will be required to handle based on how the complexity of revenue scenarios and contract modifications.
- Implement the right IT systems and tools.
With the right system in place, you can gather data from multiple places to produce clear audit trails as well as automate calculations and ensure accuracy. Your system should also link revenue source data to performance obligations based on each unique contract so you ensure proper revenue amounts are recognized.
- Adjust policies, processes and controls.
Set up controls to automate and encapsulate the processes in your system. Repeatable and measurable processes—structured, defined, implemented, and enforced—are key to effectively and easily complying with the new regulatory requirements. The documentation and the processes are never out of sync because a change to the process changes the documentation.
- Update forms, templates, reports, checklists.
Work with your auditors to determine exactly what information they need to see and when they need it. Then you can pre-define reports and queries that can be delivered on demand. Management can check compliance status on an ongoing basis via dashboards or other customizable reports.
- Most important, be totally prepared for next year.
Do all of the above now, and make your compliance a fluid, turn-key processes. Your auditors will love it, your staff will love it, the whole organization will benefit.