The Accounting Policy & Practice Report ® provides financial accounting policy makers, advisors, and practitioners with the latest news, expert insights, and guidance on emerging, evolving,...
By Trish Coughlin
Trish Coughlin is corporate controller at Workday and is responsible for all aspects of accounting and external reporting.
Trish has more than 25 years of experience in corporate finance and accounting. Prior to Workday, Trish was a managing director at Goldman Sachs where she spent more than 10 years in finance and operational leadership roles. Trish previously held roles at Honeywell where she was controller of a $4 billion business, and PricewaterhouseCoopers (PwC) where she provided services to multinational clients in the audit and transaction advisory practices. Trish is also an active volunteer in her community and is currently on the board of directors at the Community Foundation of Utah.
Trish holds bachelor’s degrees in international relations and accounting from Lehigh University.
Companies face both huge challenges and huge opportunities as they transition to ASC 606, the Financial Accounting Standard Board’s new revenue recognition rule, which is among the most significant financial regulatory changes in two decades.
As with any major change, ASC 606 adoption is complex. What makes it easier or harder to adopt will depend on any number of factors, including a company’s offerings, contract structure, business practices, current processes, and existing systems.
At its core, revenue recognition means how and when companies account for revenue. The goal of the new standard is to bring consistency and comparability and is expected to have a material impact across a broad range of industries.
While ASC 606-like changes don’t come along very often, companies are hard-pressed to adjust when they do. Issued in 2014 and delayed by a year to allow companies more time to prepare, the new rules take effect in 2018 for public companies.
Despite the extra time, Ernst & Young’s 2017 revenue recognition survey of 300 senior leaders found that 34 percent of CFOs said they’re at risk of falling behind schedule or had not begun, and 71 percent of CFOs said their revenue recognition programs were not yet complete.
The slow pace of compliance is not surprising, especially if companies have legacy information technology systems cobbled together over many decades and acquisitions. Legacy systems are older technologies that still might work but create headaches, given their complexity and inability to keep pace with change. These systems may require heavy customizations and financial investment to support regulatory and business changes, and force finance teams to work in offline spreadsheets while juggling data across multiple systems.
With more regulatory changes on the horizon, the old way of keeping pace with compliance is no longer enough.
Many companies appear to be finding that their existing systems are inadequate. Almost half of the leaders surveyed by Ernst & Young said they plan system changes as they adopt ASC 606.
This isn’t surprising, either. Often times, one of the biggest hurdles in adopting regulatory change is the technology system. Many companies have long relied upon a hodgepodge of older systems with newer applications bolted on, and spreadsheets living on individual desktops, creating version control issues and confusion around data sources.
Workday was among only a handful of public companies to adopt ASC 606 a year early and we believe we were the first software company to adopt the standard. One of the reasons we were able to do so is our own cloud-based finance system—which gave us the capabilities we needed to assess the impact of the new guidelines and make the transition.
Cloud-based systems enable companies to tap into applications, services, or resources on demand, via the Internet. Instead of hosting software on a company’s own computers, software is hosted in data centers, which enables faster and more frequent updates.
I’ve been asked by numerous organizations about key lessons and what we were able to do in our system that would have otherwise been difficult in a legacy system. To help shed light on this distinction, here are my top takeaways:
With one system of record, companies will be able to review contracts and do side-by-side comparisons of how revenue was recognized in the original contract and how it will be recognized under the new guidance, per ASC 606. This will make it easier to determine the impact of any changes. Such comparisons will be harder for companies to make if they’re still on legacy systems because contract details are often captured or stored outside the finance system of record. Companies end up spending a lot of time extracting data from multiple bolt-on systems to do assessments. For instance, companies may need to get details on contract terms, including pricing, from a different technology system and then do manual comparisons to assess how revenue was recognized in the original contract and how it will be recognized under ASC 606. With a cloud-based system, there is no bolt-on technology to deal with—all information is captured in one system.
ASC 606 allows the ability to record a contract and recognize revenue at the time when a good or service is transferred to the customer, no matter when a company actually bills. With legacy systems, this is complicated because revenue and deferred revenue posting rules are driven off the invoices they create. For instance, we were able to do independent schedules for billing and revenue, which allowed us to more easily identify which contracts would change or impact revenue and then appropriately schedule revenue under the new standard.
Transitioning to the new revenue recognition standard is a big change for any organization and requires an audit trail. Throughout the assessment phase of the change, auditors will need to be able to audit the original and new transactions under the guidelines. Documenting this transition process can be very difficult with legacy systems, with most of it happening manually outside of the system of record. If companies work in spreadsheets to capture data and approvals, the risk for human error goes up and auditing becomes a nightmare. We were able to take advantage of dual reporting capabilities, which is the ability to report under the old and new requirements directly in our system rather than manually, which helped ensure that every transaction and change is tracked, simplifying the auditing process and resources required.
Changes to accounting regulations are never-ending and the business and regulatory environment is increasingly complex. Whether it’s ripping and replacing or paying a substantial amount of money and taking the time to customize it, the technology a company uses will impact whether they can keep pace.
ASC 606 is the first major accounting and revenue recognition change in the cloud computing era. It won’t be the last. Companies that prepare for today’s regulatory requirements by adopting flexible technology systems, will be ready for tomorrow’s changes.
Copyright © 2017 Tax Management Inc. All Rights Reserved.
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