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Tackling the Systems Side of the New Revenue Recognition Standard

Red phoneAre you ready to implement the new revenue recognition standard? Due to the deferral of the effective date of ASU 2014-09, public organizations must apply the new revenue standard to annual reporting periods beginning after December 15, 2017, while nonpublic entities have until December 15, 2018 to adopt the new standard. We at Telephone and Data Systems Inc., a telecommunications company headquartered in Chicago, are working hard to ensure that we are prepared in time for the effective date.

Under the current guidance, amounts billed to customers via the billing system are generally the same as the amounts recognized as revenue in the accounting records. Under the new revenue recognition standard, however, this is unlikely to be the case. The new standard requires a reallocation of transaction price between performance obligations under a five step model, resulting in the creation and amortization of contract assets and liabilities. Although the customer experience will not change, we will have to alter how we recognize and report revenue. Given that we have millions of customers, it would be impractical for our company to manually support the requirements under the new standard. For this reason, we have determined that a system solution is necessary.

Buying vs. Developing Software Internally

In trying to implement the changes in the new standard, companies like ours have essentially two options: (1) Purchase middleware -- a software solution that acts as a bridge between the billing system and the general ledger and does the work necessary to comply with the requirements; or (2) Build our own middleware that serves the same purpose.

 The following questions have helped us decide whether purchasing middleware or developing our own software was the best solution for us:

1. What is your overall timing? To help you determine your timing, you should consider your transition strategy. Start by asking the following questions:

  • Does your company plan to transition by applying the full retrospective method or the modified prospective method?
  • Will you run parallel systems prior to the effective date and if so, for what time period?
  • What is your targeted timing?

2. What level of implementation complexity do you expect to face? Some industries or organizations may require only small modifications to their existing systems. Others are so large and complicated that no commercial software product will fully meet their needs. For those significantly impacted, a customized, internally developed solution may be best. For companies in the middle, purchased middleware may be the right choice. Do your research and see if the software vendors’ options meet your needs.

3. What is your risk appetite? When you develop an internal solution, you face the risk that it might not work as expected or that the effort will be a greater-than-anticipated drain on resources. When you buy a solution, you know fairly early on how well it addresses your needs and, even if there are gaps, you have time to adjust as necessary. That’s important, because given the implementation schedule and requirements, there isn’t a lot of time to get it wrong.

4. Will you need long-term support? If you are planning on developing your own software, you will need to make sure your IT team is ready to spend significant time implementing and engineering your solution. If you are considering buying a middleware solution, you will also need to consider the type of support the vendor offers, including availability and frequency of future releases and user group forums.

After answering the questions above, we decided implementing a third-party middleware option best met our needs.

Sooner Rather than Later

Based on our experience, we would advise companies not to underestimate the amount of time and effort it will take to identify and implement software and get your system up to speed. The longer you wait, the harder it will be. We recommend jumping in now to ensure your organization is ready when it’s time to implement the revenue recognition standard.

The AICPA’s Telecommunications Entities Revenue Recognition Task Force is hard at work identifying revenue recognition accounting issues pertaining to the telecommunication industry. The information on the task force’s webpage will be updated as the group continues its discussions.

Anita Kroll, Director- Revenue Recognition Program, Telephone and Data Systems Inc. Anita has led the revenue recognition program for the TDS enterprise from the commencement of the program in 2014. Anita started with TDS in July 2011 as the Director of Accounting and Reporting.

Heather Jeschke, Senior Analyst – Revenue Recognition, Telephone and Data Systems Inc. Heather is responsible for analyzing the accounting impact of the new standard and documenting related accounting policies. Heather started with TDS in September 2012 as a Senior Internal Auditor.

Telephone image via Shutterstock

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