Tips on Tackling Revenue Recognition Implementation
“There are seven major differences between the old and new guidance.”
“The standard changed the accounting answer for us in a few areas.”
Those are just a few observations from leaders at Oracle regarding their experience implementing the Financial Accounting Standards Board’s landmark accounting standard, Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The new guidance supersedes the current guidance in Accounting Standards Update 605, Revenue Recognition. The standard’s initial effective date was deferred, but now it’s almost here. Organizations that haven’t done so already definitely need to take the necessary steps toward compliance ASAP, and firms should advise their clients, too.
To learn more about Oracle’s successful approach to revenue recognition implementation, AICPA Chairman Kimberly Ellison-Taylor, CPA, CGMA, Global Accounting Strategy Director for the Financial and Professional Services Industries for Oracle America, sat down with two colleagues to discuss the company’s experiences preparing to put the standard to work.
Kimberly Ellison-Taylor: What was your experience in implementing the standard?
Lara Deen, CPA, Oracle Vice President, Global Revenue Recognition: It has been a massive undertaking. We began by consulting with our outside audit firm and mapped the standard against our current policies. It became clear early on that we would need to put a lot of people on this, including a very skilled project manager. We saw that it would also require a broad and deep understanding of everything we sell and how we sell it, as well as our contract terms and all their permutations. For example, under the standard, you must identify whether a contract is a new contract or a modification of an existing agreement—and there’s a significant difference in how each one is accounted for. We had multiple meetings with our internal contracts organization and EY just to understand what qualified as a modification and how it is accounted for under 606. We now have a list of close to 100 modifications and the list is still growing.
Oracle has an extensive and broad portfolio of products and services both organic (internally developed) and inorganic (pick up from acquisitions). I was surprised how much time and resources we expended to develop the knowledge across that portfolio, apply it to the new standard and document the outcomes.
That, and other experiences, made it clear that implementation was going to require resources across many different teams. We have about 40 people on a cross-functional project team working on this and three people fully dedicated to it. Additionally, almost every member of my teams (almost 100) are preparing for the adoption.
Ellison-Taylor: What’s the biggest misconception about the guidance?
Seamus Moran, Oracle Senior Director: Many of our customers think of this as just another accounting standard, but it’s much more than that. It’s a redefinition of what you do. When I meet with people, I explain to them that we have to perform a review of their promises at the inception of a contract, then identify the promise or obligation being made in the contract and determine the attributes of the promises. That’s a departure from the current approach, and they don’t understand why it’s necessary.
Ellison-Taylor: What sets this standard apart?
Moran: There are seven major differences between the old and new guidance, and each one has potential timing and valuation impacts. An organization may be expecting to perform some tweaks to comply, but that’s a lot of tweaking. Here’s one example: Under the old rules, a company issued an invoice early in the process. Since they couldn’t immediately identify the revenue, they held it in an account called deferred revenue. The new standard abolishes deferred revenue. Instead, companies must calculate and value what they have promised customers at inception, which itself is new, and then accrue it when either party acts. The valuation involves estimates, rather than our existing certainty concept. Both the timing and the basis are departures from the old rules, and companies aren’t completely comfortable making those estimates.
Deen: It impacts virtually every company in every industry worldwide, with very few exceptions.
Ellison-Taylor: What were some of the effects on the organization?
Deen: The largest impacts are on systems, processes and reporting. Most companies drive revenue from their AR module, but with the requirements of 606, revenue and AR are divorced. There are a few ways to manage this. Some companies will implement a revenue module while other companies may use manual solutions, or a combination of system and manual solutions. For us, we are taking our time and building an interim solution that meets our needs until we are fully prepared to uptake Fusion Revenue Management.
The new standard also requires more reporting and disclosures, especially around outstanding performance obligations.
Ellison-Taylor: What advice would your offer to other organizations?
Deen: It would be a mistake to put a system together, then try to figure out if it actually meets your needs. It’s much better to have a thorough understanding of your needs at the outset before making an investment in a system or a solution. And don’t underestimate the effort. Find outside experts to help you if necessary. We have a large group of very talented people that are well-versed in current revenue standards, as well as the new revenue standard, but the adoption process still feels overwhelming at times. It’s a principles-based standard versus prescriptive so there is more judgment involved in its application to your business. It is very important to educate yourself, your teams and your stakeholders. Finally, engage expert resources (accountants, consultants, subject matter experts, IT professionals, etc.) when you need it.
Are You Ready?
Companies need to be working through the standard now so that they are prepared to implement it in time for the fast-approaching effective date. For public entities, the standard is effective for annual reporting periods (including interim reporting periods) beginning after December 15, 2017. Nonpublic companies have additional time, but they should take full advantage of that time given the standard’s complexities. The AICPA has resources to help, including a roadmap to implementation, a learning and implementation plan, web events, information on industry-specific potential implementation concerns, guides and alerts. Use them to help you put this new standard to work.
Business people working courtesy of Shutterstock.