Revenue is perhaps the most important metric in the assessment of the firm’s performance and the US GAAP VS IFRS revenue recognition guidance was lacking in many aspects. As a result, the FASB and IASB have announced new guidance which removes inconsistencies and also implements a framework that resolves revenue recognition issues. These new guidelines also normalize revenue recognition practices across various jurisdictions, industries and organizations. These changes will have a substantial impact on financial reporting as well as budgeting and planning.
The rules that dictate revenue recognition for contracts will be implemented in 2018 with business planning and budgeting processes requiring a reassessment. The turnaround time between the signing of a contract and revenue recognition will have significant variation. This would inadvertently result in the divergence of real economic performance from performance measured by financial accounting. The pressure on executives to assess their business performance from a dual perspective will require a paradigm shift from the traditional methods of assessment of a company’s performance.
The buzz generated in accounting and finance circles about the impact of these standards on transactional accounting practices isn’t misguided. The new regulations streamline unwieldy processes and impose consistency in reporting revenues. These standards are based on a bedrock of principles as opposed to centrally planned rules. The standards have also expanded the scope of auditors while eliminating company specific guidance. They also comprehensively cover all firms that enter into contracts. Ensuring the triad of Sales, Legal and Finance are on the same page is a challenge that is being posed to all companies in the short term. The US GAAP guidelines which were notoriously complex will have a radical makeover in the days ahead.
The five-step-process defined by FASB that determines the revenue from customer contracts are:
- Step 1 — Identify a contract with the customer.
- Step 2 — Identify the obligations relative to performance in the contract.
- Step 3 — Determine the price of the transaction.
- Step 4 — Specify the price of the transaction to the specific obligations of performance detailed in the contract.
- Step 5 — Recognize revenue if the entity satisfies the obligation for performance.
Time to Leave Spreadsheets Behind
Experts recommend that companies currently using spreadsheets for budgeting and business planning would be better off switching to purpose-built planning applications to more easily address the challenges and complexity of the new guidelines. The same applies to companies currently using spreadsheets for financial reporting. Moving to purpose-built applications will lead to efficiency in reporting with little margin for inaccuracy in shorter timeframes.
As Derek Hazelwood, financial analyst for Interactive Intelligence noted, the cloud-based enterprise performance management platform offered by Host Analytics is helping their business planning face the challenges of the new standards. In order to avoid a crunch before the year-end proactively acting on ushering in these changes through the EPM platform would be prudent on the part of the companies that are about to be impacted.