How ready is your organisation for the new revenue recognition standard? Are you prepared to take your teams and processes through the transition from ASC 605 / SAB 104 to ASC 606 (or IFRS 15) Revenue from Contracts with Customers? If you are not, you’re not alone. According to latest market surveys, a majority of companies are not prepared for the major changes in accounting and business operations required by the new revenue recognition standard. In this article, we’ll explain the changes, show how these affect you, and then demonstrate how NetSuite as a software solution can help.
Core principle of ASC 606:
The core principle of the new revenue recognition standard is that “an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”
While taking into account the switching from ASC 605 to 606, most people assume that it only affects revenue. This assumption is not unjustified since the new standards are titled Revenue from Contracts with Customers. Having said that, these new principles-based accounting standards also bring into the bigger picture regulations that will directly affect your financial reporting, and not just limited to when and how companies record revenue. It’s imperative to be aware and brace up for the new accounting practices.
Impact of ASC 606 on Your Company:
While ASC 606 will have varying degrees of impact across different industries, it is your firm’s finance and IT teams that will be the most impacted. All your prevailing financial platforms, software and systems will need to be assessed for their ability to precisely take into account all the permutations of your organization’s possible revenue arrangements. The finance team in your organisation must ready up the existing processes and systems to ensure compliance. For bigger organizations, this will pose a larger challenge because most legacy financial systems are inflexible and difficult to modify, as they might have been implemented decades back.
Upgrading traditional, on-premise financial ERP systems will also pose serious challenges to IT teams entrusted with such a critical transition and change. These teams will be consumed by this mammoth, time-and-effort intensive exercise, which will surely take its toll on the teams and the budgets aligned.
Any privately-held company who is working toward an IPO or other significant funding event, or who has hopes to be acquired by a public company, will require a world-class financial management system that helps transition into the new standard seamlessly. Companies relying on QuickBooks and Excel, a manual solution that is tenuous at best under existing GAAP, will find this combination even more risky. For both large and small companies, any manual effort required to reconcile revenue and report results to auditors, board members and investors will result in a substantial drag on the business.
NetSuite ASC 606 Compliance:
NetSuite, as an award-winning ERP and financial solution, assists tremendously with ASC 606 compliance needs. Its relevant characteristics include:
- Flexible system
- Strong reporting capabilities
- Ability to run parallel books
NetSuite’s revenue management software has been tailored to deal with ASC 606 for businesses. It has functions following each of the five steps outlined by the IFRS, such as Revenue Arrangement transactions to identify customer contracts and Revenue Elements to identify performance obligations. This is all well integrated with the rest of NetSuite ERP, making a seamless connection between sales orders and accounting functionality.
Because of its flexibility, Netsuite can be more easily configured for changes in accounting standards than many legacy systems. As a cloud solution, it also reduces your IT burden significantly.
Meanwhile, the software’s reporting capabilities allows you to quickly generate reports for auditors and other interested parties. And with the use of NetSuite’s Multi-Book Accounting, you can run parallel books during the transition, helping you deal with both standards simultaneously. As a long-term solution, this is also important, in case there are any future changes in standards.
The first reporting period for the new revenue recognition standard will be after December 15, 2017 for public companies and after December 15, 2018 for nonpublic entities. Top companies like Alphabet, General Dynamics, Raytheon, UnitedHealth Group, and Workday have already taken the early adopter route and filed their fiscal year-2016 / 2017 10-Ks, which shows a clear acceptance of the change and with them incorporating the new standard with an objective of positive impact on profitability. If your company is not already prepared, it is important to get the process started to change your long-term processes. The NetSuite ASC 606 solution will simplify that effort significantly.
Bista Solutions is a certified NetSuite implementation partner, with over a decade of experience in ERP solutions. For a free 30-minute consultation, just give us a call at 1 (844) 233-0652 or just use our contact form.