Due to the importance of the new revenue recognition standard, and its potential to have a pervasive impact on the financial statements, the implementation plan is bound to be complex. Companies going through this process should be careful in planning. The six areas that we recommend for companies to consider in its planning for implementation are as follows:
Tone at the Top
The new standard is comprehensive in nature, encompasses many aspects of the financial reporting structure, and may significantly alter the reported results of operations. It is important, therefore, that management and leadership within an organization, and its governance team, approach this with a positive mindset. Adoption of the new standard should not be just another exercise in compliance. It is critically important to the organization and stakeholders. Management should understand that having procedures in place to ensure that the nature of the adoption and the effort put into its implementation is not only necessary but important to the future success of the organization and its teams. All aspects of the implementation should be infused with this understanding.
Resources and Budget
Careful thought needs to be put into how many additional resources are needed, if any, to ensure that the implementation gets done on a timely basis. Although implementation costs are always a concern, and should not be overlooked, decisions on resources based primarily on cost could be catastrophic and have major financial implications, far more than any short-term costs that might be incurred for an effective implementation.
The right resources are important as well. It is important to ensure that a company partners with a consultant that has the appropriate technical depth available to enable timely, accurate accounting to be done the first time through, where changes and corrections can be minimized. The use of resources should be matched up with the timeline as discussed below.
Timeline of Implementation
Sufficient time should be allowed for an effective implementation and for management to deal with any potential problems that may occur along the way.
Timelines should consider and be adjusted for:
- Complexity and risk – The implementation should prioritize those areas that are riskier or more complex to be dealt with early in the process. This allows for those areas that require more effort, or those more prone to failure due to complexity or fraud, to be addressed properly. Simpler and more routine classes of transactions can be dealt with later in the process. Risk should play a key role in the decision. Even complex revenue streams should be deprioritized behind those that are less difficult to understand and account for if there is a significant risk of material misstatement related to those areas.
- Milestones – Detailed analysis and creating of schedules for the implementation is a time consuming and complicated process. Along the way, complex decisions need to be made, and sometimes a change of course may be required. Similar to preparing for any significant project, designated milestones for key areas should be defined and laid out, and timelines should have designated times for meeting and discussing results. This allows for the project to be effectively shepherded in manageable chunks and decisions to be made by the appropriate people in a timely manner.
- Review and recording of transactions – Management should ensure that timelines allow for sufficient review of the revenue streams, the accounting schedules, and the related entries.
- Final product drafting and review – Eventually, all the work must be recorded in the company’s books and records, and the financial statements, disclosures, and compliance documents (such as periodic filings with the SEC) need to be drafted. This part of the process is also time consuming and critical. This should not be left for a few days at the end of the plan. Sufficient time should be allowed for the detailed preparation and review of all the filings and deliverables that are impacted by the guidance.
Process Owners and Accountability
Companies should identify process owners and required tasks for all the key revenue streams. This would include a detailed listing of tasks, along with expected timelines in each of the impacted revenue streams. Tasks and overall processes should be assigned owners (those responsible) for ensuring the objectives are met within the prescribed times.
This should include simple things like creating the schedules and identifying contracts, to more complex matters like evaluating customer relationships and contract provisions for matters that impact the recognition of revenue, the preparation of journal entries for each period, the approval
of those entries and their posting in the records of the company, along with drafting of financial statements and disclosures and the appropriate regulatory disclosures.
Like anything related to financial reporting, the execution of the plan should be subject to effective controls around the approval, execution, and recording of the changes associated with the new standard. In addition, it is critically important to manage the segregation of duties and other fraud-related controls.
All relevant stakeholders of the implementation should be involved in the plan development and execution, at least in the context of understanding its impact. This includes management, the audit committee, the attorneys and the independent auditors. Stakeholders should be aware of the scope, major judgments, and the overall timeline. They should be kept involved to the extent dictated by their role as stakeholders.
For instance, finding out whether the independent auditors disagree with anything related to the implementation near the end of the project, or even half way through, may significantly hinder the progress of the implementation. Likewise, making the audit committee aware of changes to the original plan, or the impact assessment, without them being involved in the decision making on direction may also cause issues for everyone involved. Both of these situations may cause delays, increase work, or result in rework.
A detailed communication plan should be developed to keep all those involved informed of the progress and results of the implementation.
- Stakeholders, including process owners, reviewers, the audit committee, the independent auditors, and anyone else identified as important to the implementation, should have defined communication methods and triggers for communication.
- Communication should occur when milestones are reached and as the implementation progresses to completion.
- Significant issues arising in the implementation should be communicated to all relevant stakeholders and the responses thereto.
- Changes and modifications to the original plan and assessment should be communicated on a timely basis to all those involved.
The implementation plan for the new revenue standard can be complex and should include all six major components discussed above. The plan should be comprehensive and designed to deal with any contingencies that may arise. Failure to have a workable plan that takes into consideration all stakeholders could negatively impact a very sensitive and important implementation project. Planning, preparation, and communication are key to the success of this implementation.
For more information or to discuss our Revenue Recognition advisory services, please contact Elberta Nizzoli at email@example.com or at 310-477-3924.