Intacct have published the results of a survey about changes to ASC 606 revenue recognition guidelines. 187 finance executives in US based companies were surveyed and the results are shocking. It seems that a significant minority (13%) are not even aware of the changes that may affect reporting as early as next month. A majority (54%) have not even started doing anything about the changes.
Enterprise Times spoke to Rob Reid, CEO at Intacct to get a deeper insight. We challenged him about the 13%. Reid said: “I also found it stunning, these were financial executives. Perhaps they are expecting their auditors to keep them informed. The AICPA is doing a lot to educate people though.”
We asked Reid why he though people were not even assessing their companies yet. His opinion is that companies may have felt that the standards would be deferred for another year. They were deferred once before but that now seems unlikely.
Reid also referred back to another survey that was carried out during a major investment bank’s conference for the software industry. A survey of the CEO’s present at the event asked them what they were doing about the new accounting standards. Seventy five per cent asked: “what accounting standards?”
So why do they matter
While there seems to be an almost apathy amongst business leaders about the new standards, we asked Reid why they mattered. This is a question that doesn’t seem to have been asked much and Reid gave a considered reply. He was not aware of any regulatory obligations or fines around the new standards but it would cause both public and private businesses issues if they were not adhered to?
Reid’s initial comment was: “The issue is that when you go to get a bank loan or want to start a business. Venture Capital will want to see latest standards for revenue as they will want to trust the information given them.”
This may seem extreme but if competitors are using the guidelines there will be a lack of trust. Revenue recognition for cloud software subscriptions have already come under fire for some companies. Over the next few months CEO’s and their CFO’s will quickly realise that they will need to get a grip on these new standards.
Who do they matter for
Reid highlighted the move to subscription based business models that will result in many industries being impacted. Unless companies adhere to the guidelines they will find it difficult to get loans or funding. For public companies auditors may be unwilling to sign off the accounts. This could have a serious impact leading to loss of investor trust and could lead to stocks plunging. CIPAA has a report that highlights the industries most affected. These will include: automotive, banking, biotech, construction, government contracting, healthcare, insurance, life sciences, manufacturing, media, oil & gas, Real Estate, service, software and transportation.
Companies that have multi year contracts will be affected from December this year. Revenue Recognition goes into effect in 2018-2019 for both public and private companies. They will therefore need to dual run both ASC 605 and ASC 606 according to Reid. The sooner they do so the less retrospective work they will need to do. If they are looking to raise cash based on that revenue projection, they may already be hitting problems unless they can demonstrate they have the changes under control.
Some companies, particularly manufacturers, may feel that the changes have no relevance. However, the change to multi year subscription based maintenance contracts changed that. Reid acknowledged this saying: “It could have an impact with these new standards, the way you allocate costs against projects can have a tertiary impact.”
The survey pulled out three issues that finance executive are concerned about. 48% are concerned by accounting for variable consideration in customer contracts (59%). Dual reporting during the transition phase was flagged by 51% while accounting for costs to obtain/fulfill customer contracts (48%). Reid added a fourth that he feels companies should also add, that is, the business process changes that are required to satisfy these.
The point Reid was making is that this is not just a change to the way in which finance controls are implemented. It could impact the wider business, Reid cited the quote to cash process as an example of this. The interpretation of the collectability threshold is evolving for example. What was previously recognizable as future revenue according to the sales team may no longer be the case. Business change can take time, and certainly need involvement of the business head outside of finance.
So what can business do
Reid was keen to point out that Intacct offer an ERP solution that delivers the future revenue recognition functionality. It was first available in May and Reid believes that it was the first company to do so. He cited four actions that CEO’s should take now:
- Ask the CFO what do we believe the impact of the changes will be. Organisations need to evaluate the standard and assess how they want their future contracts built. Then build the process for that approach.
- What is the process to determine the impact.
- Do we need to make modifications.
- Meet with our auditors to get further advise.
Conclusion
While the sample of this survey is actually quite small, only 187, the results were still surprising. Companies in the US need to be more aware of these changes and the impact it can have on their business in the coming months. While the efforts of professional bodies have filled many webpages, it seems that business leaders are focused elsewhere at the moment. Business as usual is too busy to contemplate these changes and they have been wrongly dismissed as something that may not happen.
The impact on the rest of the world is less. However, some businesses still need to be aware of the changes, especially if they need to report on US subsidiaries.
