Data Quality: The Main Hurdle for Shift to New Revenue Rules

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By Laura Tieger Salisbury

Companies preparing for new revenue rules in Jan. 2018 must find the relevant information they need to be able to implement the standard’s five-step process of recognizing revenue, said PwC executives.

“Data quality is categorically the biggest problem,” Bob Woods, partner at PwC, said.

If the contract details don’t contain the “data points” required by the new five step process, then, all the new “shiny” software tools and applications will just be a waste of the client’s money, time and resources, because the data will either be wrong or missing, Woods said.

Bob Woods and Jim Berres, PwC director, shared lessons learned from their clients who are early adopters of the standard. These clients include Ford Motor Co, Microsoft Corp, and Raytheon Co.

Woods, who spoke at the Institute of Management Accountants (IMA) annual conference in Denver June 21, said that extracting the relevant details is often time-consuming and difficult—especially for industries with long term contracts—because they weren’t written with the new revenue rules in mind and as a framework.

Berres suggested using the process for preparing for adoption of the new rule as a way to try to standardize contracts. This would make it easier for software programs, in future, to extract the required data points for financial reporting.

Shift in Methodology

Recognizing revenue under ASC 606 reflects a “fundamental shift in methodology,” Woods said. He described the change from “billings and invoicing system to contracting, and from delivery to obligations.”

A company making an initial assessment of the impact of the revenue recognition rule may have to sift through “thousands of contracts” to find the typical revenue transactions for each revenue stream of its business, PwC’s Bob Woods told Bloomberg BNA.

In a long-term contract, such as found in the aerospace and software industries, revenue that can be presently recognized may have to be traced back to changes made in the contract five years ago, Woods said.

Depending on the company’s contract management system, Woods told Bloomberg BNA, all the pertinent data points for ASC 606 calculations such as start date, end date, price, product sold and return policy, may not be conveniently located in one convenient folder.

Unless companies have a well-organized contract management system, tracking the relevant data may mean a company-wide search of different departments.

“Data as a life blood is becoming more and more important to accounting departments, he said.”

Cascade of Effects

Employee commission and compensation are what Berres said he uses to show clients that “the new standard is way more than just an accounting change,” and why they “need to care” about the new standard. Berres used the example of how company practice might have to change from giving monthly commissions after a product sale if that revenue can’t be recognized until after the follow-up services contract is completed.

A participant at the session asked for an opinion about when to recognize revenue from her company’s $5 million dollar hardware product sale and a $50,000 commission fee that is paid much later.Woods said that the allocation of performance obligations rules allowed, in his opinion, to recognize the $5 million up front and the $50,000 when it occurred.

The trend in allocating performance obligations in a “basket of goods sale,” such as is found in an initial license of software followed by support services for the next several years, is to recognize the initial part of the revenue up front and the revenue from the services contract ratably, or as it occurs, over the length of the agreement, Woods told Bloomberg BNA.

Work With IT

PwC advised participants to be aware that the capability for recognizing revenue isn’t inherent in the accounting department and to work with the Information Technology (IT) department.Clients who have successfully early adopted have a strong IT department, PwC said. Without a strong internal IT division to assist with extracting relevant data from the contracts, companies have had to hire a lot of external resources to assist with the implementation.At this point, the competition for external resources will be intense and very costly, PwC said. Spending resources on making sure the data is reliable is more important than which industry vendor offering software capable of performing the ASC 606 calculations, a company chooses, PwC said.

Woods told Bloomberg BNA that about half of their clients are “sticking with Excel,” especially now that there isn’t time to implement an automated system before the adoption date.

To contact the reporter on this story: Laura Tieger Salisbury in Washington at LSalisbury@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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