It has been more than three years since the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointly issued the dramatically revised Standard for recognizing revenue in ASC 606, Revenue From Contracts With Customers. Public Companies are required to comply with the new standard for annual reporting periods beginning after December 15, 2017 (FY 2018) and private companies for periods after December 15, 2018 (FY 2019).  Virtually every company that reports under US GAAP will have some impact by this new standard.

Despite the years of advance notice, an uncomfortably few companies have completed the necessary action to adopt and comply with the new standard.  With only a few short months left for some and regardless of which poll you read, the message is clear: only a small percentage of public companies are fully compliant, the vast majority remain stuck in an ambiguous “assessment” phase which could represent anything from inquiring what the standard is even about all the way through a full documentation of what will be necessary to gain compliance but still short of actually beginning implementation, and finally as many as 15 percent haven’t even started assessing.  It has been reported that more than one-third of companies are facing challenges and risk falling behind schedule. The numbers are even greater for private companies.

So why are companies struggling? Is it simple procrastination? Competing priorities among projects? Lack of resources? Reasons cited for the lack of progress have included inadequate employees to complete the work, lack of project or change management leadership, difficulty with interpreting the new requirements, inability to readily access the required data, insufficient funding, naiveté at the magnitude of the impact to multiple business functions (thinking of it as merely an “accounting problem”), etc.

The reality many companies are learning during their adoption process is that the new standard actually affects most functions within their company and not just Accounting. For example, Legal is Impacted because not all legacy contracts may be adequately drafted to permit recognition under the new requirements and future form contracts may need to be redrafted to include new elements. IT is impacted because 606 requires data that may not currently be captured in a company’s existing ERP or accounting systems configuration. This data may be as simple as contract execution and expiration dates or more complicated such as material obligations contained within a contract. Sales and Marketing can be impacted by needed changes to selling models or go-to-market strategies to maintain compliance under the new requirements.

Your Tax group will be impacted relevant to planning, reporting and compliance at all jurisdictional levels and, in some cases, could represent one of your most significant costs, something most companies haven’t even yet contemplated.  Even Investor Relations can be impacted due to changes in disclosure requirements both ahead of adoption as well as afterward.  Internal Audit is impacted by changes needed to internal controls and SOX compliance.  Further, don’t forget to consider impacts to debt agreements and covenants which could be impacted by a significant change in reported revenues and determine whether renegotiation may be necessary. Because impacts vary considerably between companies, these examples are not intended to be all-inclusive or that all may necessarily apply.

We have encouraged our clients to consider using their adoption of 606 as an opportunity to simultaneously drive deeper changes in the organization to improve efficiencies. Examples could include business process improvements, better internal controls, implementation of a contracts management system, strategic operating cost reductions, IT systems rationalization and improved integration, better data quality, simultaneous adoption of the new Lease Accounting Standards and more. By leveraging the activities involved in the 606 adoption projects, your ROI on these investments could be enhanced by progress and improvements in these other areas with only incremental increases of activity rather than having separate projects for each.

Another major misconception is the belief that the adoption process is not that involved and will not require that much time.  The reality is that simpler adoptions typically take at least a few months and more complicated ones can require a year or more.  When one considers the challenges just behind reconfiguring or replacing one or more IT systems or the necessity to review potentially hundreds or thousands of contracts sometimes only available in paper form and perhaps in multiple locations, it becomes readily apparent that this transition is no small undertaking.

Some of the steps necessary to grow compliant on the new standard that we recommend include:

Evaluate your internal resources for the number and identities of employees with relevant expertise to assist in their impacted functional areas, the amount of bandwidth they have available to contribute to a major project and potential leadersNominate one employee to become your ASC 606 guru that will undertake a deep dive into learning everything they can about the new standard and the requirements and that will be an overarching internal lead to help drive and coordinate the interrelated projects from various functionsFor each functional area impacted, identify deficiencies in staffing, expertise, available time, etc. to begin to determine what outside resources may be required and potential sources to provide themDevelop relevant budgets for each impacted area either under a specialized program budget for all related projects or within each department’s existing budgets spread over the months in which activities are plannedPerform due diligence to identify qualified firms capable of assisting  your implementation and providing the required expertise and resources to perform all tasks that can’t be completed internally and get them contracted as soon as practical to ensure availabilityIn collaboration between your internal and external resources, identify an overall steering committee to oversee the total implementation program and then internal and external team members for each functional project, including internal and external leadsIdentify specific milestones and timelines for when each required step will be achieved and obtain buy-in from all impacted program and project leadersAssess and quantify the potential impact to your reported revenue, taking into account various selling models, complexity of customer arrangements, geographies in which you operate, corporate legal structure and entities, etc.Consider potential changes to your financial reporting:  changes to journal entries, financial statement presentation changes, impacts to EBITDA, changes to balance sheet (will you be more leveraged?), etc.Depending upon the level of anticipated impact to your company’s financial performance, determine whether you can adopt 606 under the Modified Retrospective Approach or the Full Retrospective ApproachDraft relevant white paper(s) to document your findings, conclusions and approach to share with your auditors and obtain their concurrence and feedback early in the process and maintain regular engagement throughout the processReview existing contracts to compare recognition under current standards to 606, ensuring that you achieve adequate revenue coverage to satisfy your auditorsPerform a data gap analysis on your existing IT systems between both standards to determine what you are not capturing today that will be required going forward for both revenue recognition and disclosure purposes and make a determination of how best to capture the missing elementsAnalyze the legal terms within your contracts to determine if they are adequate to satisfy the new requirements, emphasizing provisions related to material obligations, termination, pricing and enforcement

I have characterized the situation surrounding adoption of 606 to some clients as a perfect storm that is brewing on the horizon.  Limited time to adopt remains. Most companies have scarce internal people or bandwidth to accomplish the necessary tasks while continuing to perform their regular day jobs and that may already be stretched for other special projects. There is currently a well-documented extreme shortage of accountants in the United States and an even smaller number of individuals or firms available that have the knowledge or experience to lead or even assist in a 606 adoption. As discussed above, there is a significant number of companies that are already behind with much remaining to be accomplished in a shrinking amount of remaining time. The demand for already constrained external resources is growing. The cost to acquire any external resources needed to assist in your adoption is increasing weekly as many of those resources are already fully deployed in ongoing projects. All of these factors combined represent an increasingly-urgent situation that is definitely not improving with time.

The critical takeaway should be that the remaining runway before 606 becomes effective is growing ever shorter and it is imperative that you act quickly to avoid missing the compliance deadlines. Further, don’t forget the new disclosure requirements under SAB 74, obligating public companies to formally disclose to their shareholders where they are in the process and any risk associated with failure to timely comply.

Jerry Justice 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