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The deadlines for companies to meet the new ASC 606 accounting standards changes are fast approaching. Public firms have until Dec. 15, 2017 to get ready for the changes, and private firms need to be ready by Dec. 15, 2018.
In this Q&A, Rob Reid, managing director of Sage Intacct, Inc., discusses what the accounting standards changes are and what companies need to consider as they prepare to comply by the deadlines. Reid was the CEO of Intacct, a provider of cloud-based financial accounting software, prior to its acquisition by Sage earlier this year.
What are the accounting standards changes?
Rob Reid: These are the largest accounting standards changes in the last 14 years. It's not as big as Y2K, which was a computer issue, but this is the largest change in revenue recognition standards.
The [FASB] Accounting Standards Codification -- ASC -- is about going in and setting up a contract as the master that drives all of your accounting needs. They're trying to get a separation of the different performance obligations that you have in each contract with a customer, and then recognize that revenue as those are performed rather than recognizing it all upfront or all at the end.
What does this mean for businesses as the try to meet the deadlines for compliance?
Reid: It's causing virtually every organization to go through and look at how they have been doing their accounting and how they are going to move to this new standard. The standards were put in place years ago to protect investors, and now they just want to make sure that people understand what's really going on in the business.
All public companies have to move to ASC 606 by Dec. 15, 2017, and private companies have until Dec. 15, 2018. The private ones that need to move to it are those that want to get a bank loan or that want to get venture or private equity funding.
How are most companies doing in their preparations?
Reid: Most public companies understand that they have to do it, and ... they started on that journey anywhere from a year ago to six months ago, so they're scrambling a little bit.
But most have found that this isn't really just an accounting change, it's a change in the way you do business. How does a sales person take an order? How does it get reflected? How does it then flow, whether it be from a quoting tool or CRM tool back then into the accounting system.
The private companies are probably way behind; most think they've got 15 months to do it, but then you think about what you have to evaluate, what you're going to change, and all of the people that it's going to impact. Then you need to review it with outside auditors and get your audit committee to agree to it, and finally bring the IT on in to make sure that everything is going to work from a process flow.
If you're not already working on this, it's going to be hard to get it done, especially for smaller organizations where they don't have a lot of staff. So that's the reason why the alarm bell should be going off for private companies.
How do you get systems and processes ready?
Reid: First, you just have to go through and identify all your customers and all your contracts, which is a big effort for large organizations. Then, you have to look at all your contracts and look at all the different ways that you perform for that customer; from an accounting perspective, they call it performance obligations.
Let's say you provide a pump for a cooling system, and you also get the labor for that pump and provide a 12-month maintenance program. Those would all be considered obligations, and you can recognize your revenue for each one of those as they are completed. In the past, some may have recognized all of the revenue as they got the contract or they may have recognized it at the end, after they have completed the obligation.
So the new standards are trying to get some consistency there. And then they've got to go through and really understand the transaction pricing by contract and for every one of the obligations, and the pricing associated [with them], and then how they're going to recognize the revenue and what that waterfall of ... that revenue is going to be by every contract and by every obligation.
You have to evaluate all of the systems and all of the workflow processes that do those different things and decide how you are now going to handle all of these different elements of the contract and recognize the revenue at the appropriate time, then validate that the obligation has been completed satisfactorily from the customer's perspective.
Will the new standards affect software companies who derive revenue from subscriptions or other business models differently?
Reid: Software companies that are in the cloud were already recognizing revenue ratably [proportionally] over a period, so that wasn't an issue.
But say you used implementation assistance from consultants; there could [be] different treatments on the way you recognize that, such as recognizing it ratably over the life of the contract with that customer or recognizing it as services were performed. Now you have to recognize it as the services are performed, and this is actually going to improve the revenue and the performance of a cloud software company.
I think it's really trying to get to [what services] are being performed, when they are being performed, and also allocating up the expenses, as opposed to just booking the consultants' expenses ratably over the year. This way, the expense of that consultant is going to be recognized when you receive the revenue on that completed project.
You're going to start seeing a clearer picture of the impact on the overall business with these new standards, so there's more transparency for investors and they're going to have a better understanding of what's truly going on. And there won't be as many surprises as there could have been under the old way.
What's going to happen if your systems are not ready?
Reid: That's a really good question. For public companies, their auditors won't sign off on their results, and it may be devastating that a public company has to go and say 'These are unaudited financials and are not up to the standards of ASC 606.'
Investors may pull their money out, the stock could go down, employees that have stock options may not stick around; so there are a lot of negative impacts. I think the public companies are being very diligent about making sure it happens. Many are still scrambling, but they're going to get it done.
Private companies are a different issue. Unless you're going to get a bank loan or get money from investors like VCs [venture capitalists] or a PE [private equity] firm, there really isn't a consequence for a tightly owned organization.
But if somebody comes along and wants to buy you, but now you're not up to the standards, they might walk away because they can't trust your information, or they may lowball you because they have to assume that there are issues somewhere within the numbers. So it could be difficult to get money for operating capital, and it could cause issues if you go to try and sell your organization.
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