The time for adoption of the new accounting standard, ASC 606, is quickly approaching and many Companies are busy with various aspects of their implementations. Some public companies are or will be disclosing their status with respect to this new standard in their various filings with the SEC.  Hopefully, when their time for adoption comes, they will be ready, not only with the compliance aspects of the standard, but be ready organizationally to make the necessary changes.

Adoption of revenue recognition time frames will be phased depending on the company.  Not all companies will need to adopt simultaneously, but all will need to adopt, and the Impact will range from non-existent to material, depending on the company.  One can easily find numerous articles about this standard and ways to get professional help to prepare your organization for the change, but rather than talk about how to adopt, let’s give some thought to the organizational impacts on your company.

The status of the 606 implementation seems reminiscent, although on a much more targeted scale, of the 404 implementations when many companies scrambled to complete their SOX 404 certifications.  Some waited until very late in the cycle to implement 404 and consequently some reported significant costs to the enterprise during the closing months of their preparation. These costs were highlighted on their conference calls and in their discussions of operations.  It seems unlikely that the cost of the implementation of the 606 standards will approach that of 404, mainly due to the sheer magnitude on the entire operation of a 404 implementation, but the financial impact of 606 may be much greater at least in the short run. The question is what to do about the impact now.

Despite the best attempts of most finance organizations to have rolling twelve-month detailed budgets, and three- or five-year projections, detailed planning always seems to be done in the final quarter or in the early part of the current fiscal year. Companies roll out incentive programs to executives, managers, the sales force and employees, make staffing and budget plans, forecast capital deployment, and earmark the costs associated with the new capital. With revenue likely to change under the new standard, these efforts might be significantly impacted if top line revenue changes.

The impact might also affect your external communications as well. Public Companies pretty much cover the whole range of guidance, from none to very detailed over an array of time periods. How will CFO’s shape their thinking today about their forward guidance? Many companies have financial covenants with lending institutions and private investors. How are they thinking about their projections? Some companies are in the process of new financings and preparing projections for those financings. How is this change going to affect future results? How will the change impact your financial covenants, if any?

There are many articles that talk about companies being behind in their assessment and implementation. If that is truly the case, then the impact on the company’s financials has yet to be estimated. So, what will be done about these plans and projections? How will CFO’s shape their guidance and projections?

Let’s look at this in three steps. There are too many sub-steps to list within this writing, but it’s fair to say that there are many and all will be different depending on the industry, size, and shape of the companies impacted. This should, however, provide some thought for organizations to help shape their thinking about the major tasks.

Companies today are in various stages of assessment and implementation.  Some have completed the task and have moved on to the second and third steps while some may be in the early assessment stage. A look at the task holistically clearly indicates that sooner rather than later is preferred as the steps that follow may be dependent on the prior step’s completion.  Also, as the 404 certification process demonstrated, the last minute becomes a very expensive proposition as professional resources to perform the work become scarce and expensive.

Once your group knows the changes that are needed to the company’s contracts and procedures, as well as the impact on revenue carve out and sequencing, impact analysis should start.  Identification of the stakeholders and the change it will have upon them should be prepared. Groups that are impacted will vary by organization, but starting with an analysis of the impact on sales, legal, accounting, IT, human resources, auditors, and external readers of your financials is a good idea. If you haven’t already done it, consider making all the internal stakeholders part of the “implementation team” early in the process so they can be prepared.

By nature, people resist change. The attitude and leadership of those in charge of the implementation team will be critical in the process. Consider taking the position that this change, while inevitable, is an opportunity to improve your processes and procedures and ultimately reduce the workload and improve the accuracy of the revenue cycle.  Make a key goal of the implementation to improve other processes that will be impacted. Make the organization better than when you started. For example:

While updating the company’s SOX documentation to incorporate the 606 changes, consider re-evaluating the process and find steps that can be eliminated or streamlined while maintaining a control environment that is sound.Implement system changes in IT that provide better and improved reports and processes.Consider opportunities to standardize customer contracts.Consider the impact on incentive programs and take the opportunity to rethink those programs to drive performance.

It is helpful to communicate changes with readers and users of your financial information as soon as possible to give them a chance to prepare for the change. Again, many companies will be affected by this and their audience is large and varied, so no set “one size fits all” answer is available. In most cases though, no matter who the reader is, communication of the change sooner rather than later is probably preferred.  

Clearly, the adoption of ASC 606 will bring changes to your organization; how much of an impact is company-specific. The purpose of this article is to trigger the thought that a call to action in other parts of your organization may now be upon the company.  CFOs today are coming to grips with the changes and most are well positioned within their respective organizations to lead the many changes likely to impact their organizations from the adoption of 606. Planning and communication that is started early in the process may help companies more easily accept the coming change. Continuous improvement in your processes and procedures can positively impact your company, so take the opportunity to reexamine your policies and procedures during this process to see if improvement can be made. 

Sam Auriemma is a Principal in the Pursuit Advisory Group in Newport Beach, California.  Among several practice areas, PAG assists its clients with adoption and implementation of ASC 606, SAB 74 and the new Lease Accounting Standards.  For additional information, visit www.pursuit-advisory.com