An impending new accounting standard represents one of the most significant changes to corporate finance in years. Although compliance will require significant effort throughout an organization, IT departments will have to do some of the heaviest lifting.
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are changing the way companies must recognize revenue. Previously, there were distinctions between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), which meant that economically similar transactions were often handled differently. The new rule, officially known as Accounting Standard Codification (ASC) 606, will likely have a significant impact on revenue disclosures. The changes go into effect beginning after Dec. 15, 2017, for public entities and certain employee benefit plans that report under U.S. GAAP.
ASC 606 also applies to nonprofits — like for-profit entities, they will need analyze contracts to determine how they will handle the proceeds from transactions with their customers. In addition, nonprofits must implement new FASB standards for classifying net assets, tracking liquidity and presenting expenses.
A poll conducted in May by Deloitte suggests that organizations are underestimating the effect of the changes and are behind in their implementation efforts. More than half (52 percent) of poll respondents do not expect the standard to have a material impact on their organization’s financial statements — a potential oversight given the effect on disclosure requirements. Furthermore, 55 percent indicated that their organizations had not started to assess internal controls from a revenue recognition standpoint, and 45 percent had not started to assess disclosure requirements.
As finance departments analyze contracts to determine how they will book sales under the new rules, IT will likely need to upgrade accounting packages and potentially install new applications. Accounting software that has been customized will have to be modified, and those changes implemented throughout any customer-facing and back-office applications that integrate with accounting systems.
The reporting of financial results has always been difficult because data often comes from multiple sources. The problem is particularly acute in organizations with two or more autonomous operating units. Some organizations use business intelligence tools to merge reports and create proprietary dashboards, but others rely on error-prone manual processes. Either way, those processes will have to be redesigned to meet the new requirements.
Many organizations will decide to implement new applications that have been designed for ASC 606 compliance, but that won’t be a simple solution. New applications will likely require some customization to fit existing systems and processes. If so, IT must work closely with the finance department to ensure that the customizations align with audit controls.
The FASB and IASB issued the new guidance on May 28, 2014, and many large public companies have been working for years on implementation. Privately held entities that report under U.S. GAAP have until Dec. 15, 2018, to comply but that’s not much time to prepare.
If you are unsure about where you stand with ASC 606 or what you need to do to become compliant, give us a call. We can help you modify your existing accounting software or select and implement a new package to ensure you’re prepared for this significant change.