If you run a public company, you’re likely aware that ASC 606, the new federal revenue recognition guidelines, go into effect December 15, 2017. The question is “Are you ready?”
If you’re like the majority of companies, the answer is probably “no.” When Deloitte polled finance professionals at the Deloitte-Bloomberg revenue recognition conferencein May, half of respondents said they were still determining how they would implement the new standards.
The Financial Accounting Standards Board and the International Accounting Standards Board issued ASC 606 in May 2014 as a means of standardizing revenue recognition in the global services economy.
Regulators spent 12 years studying how best to address revenue models such as digital subscription and on-demand services, and Bloomberg calls the resulting legislation “the most historic accounting changes to hit U.S. capital markets in decades.” In early signs of the guidelines’ impact, General Motors indicated that its revenues could drop by $1 billion under ASC 606, and Uber’s reported revenue could be cut in half based on the new law.
As is always the case with new accounting regulations, most finance teams see ASC 606 as a burden, which is likely why they’ve been dragging their feet. They’ll have to make large-scale process changes that require significant investments in data, software, and training to comply with the new rules.
But to view ASC 606 solely as a burden is to miss the bigger picture. Yes, the guidelines are disrupting revenue recognition and forcing massive change. However, the impending deadline is also an opportunity to reexamine and optimize inefficient accounting processes to better position your business for strategic, long-term growth.
Consider ASC 606’s impact on credit. From January onward, companies will need to run credit checks on all sales opportunities to ensure collectability before that revenue can be recognized. Now, this could strain credit departments, many of which have shrunk during the past 10 years. But it could also motivate credit executives to introduce automation solutions that will alleviate resource constraints and reallocate limited resources to more value-added analyses.
ASC 606 also demands more consistent monitoring of M&A deals, as well as a streamlining of procedures for clients who hold multiple contracts with the same service provider. While coming into compliance in these and other areas requires a hefty upfront commitment, the effort will pay off in long-term efficiency and clarity.
Seizing Opportunity With ASC 606
As you evaluate new revenue streams and pricing models, you must also engineer plans for instituting compliant revenue recognition. Fortunately, the steps you take ahead of ASC 606’s deadline will improve your processes for years to come. Here’s how to ensure compliance while making the most of this opportunity:
1. Kick Bad Data to the Curb
High-quality credit data has never been more important. Revenue recognition is tied to the collectability of the sale, so partner with reputable data providers to identify likely payers and flag potential risks.
Before signing with a provider, ask how they gather and verify the information they provide. Inferior data will yield analyses that inaccurately characterize likely payers as unlikely payers and vice versa, slowing revenue recognition.
2. Automate Customer Credit Decisions
In the past, some businesses opted to take a “ship and chase” approach to accounting, which meant they didn’t run credit checks before signing clients. But the generally accepted accounting principles now stipulate that companies conduct credit checks on each new sales opportunity to establish collectability.
Automating decisions will help ensure compliance with ASC 606, but it will also lead to better business outcomes. In the past, a move toward automation may have been motivated by cost-cutting opportunities. But successful finance teams today realize that automating based on predictive analytics leads to more profitable decisions than a manual approach.
3. Institute Across-the-Board Account Monitoring
The new emphasis on credit checks and collectability demands ongoing awareness of your customers. Finance teams that have focused strictly on credit-worthiness at the point of sale must expand their approach through ongoing portfolio monitoring.
This holistic approach can help finance leaders better identify new risks and opportunities. Credit profiles aren’t static, and best-in-class organizations know that a point-of-sale approach may miss profitable customers. Notifying sales of newly increased credit limits is a great way to partner in pursuit of top-line growth.
4. Communicate Revenue Impacting Channels Immediately
Any change to a customer characteristic can affect the value of an associated sales event. Mergers and acquisitions, for example, can dramatically change the risk profiles of involved companies. Even a quarter of poor performance on the part of a client can call the company’s collectability into question, risking deferral of revenue due.
Under ASC 606, the credit team will no longer be reporting on the state of accounts receivable; they’ll report on the state of the companies themselves that make up the accounts receivable. Only through ongoing monitoring and dialogue by all financial arms of the organization can credit teams do so effectively.
5. Emphasize GAAP Standards in All Operations
Following GAAP standards is a must for growing your business. But it’s not enough to be GAAP-compliant within your organization; it should be a criterion of working with partner companies as well. Organizations with large buying potential and vast numbers of suppliers require the highest accounting standards to mitigate supplier and credit risk in a scalable, equitable way.
Prior to ASC 606, inconsistent financial reporting across industries made demystifying true revenues nearly impossible. But ASC 606’s simplified approach to revenue recognition applies globally, making it easier to assess customers’ risk profiles, especially with credit automation software.
In the short run, financial executives may find ASC 606 burdensome. But it promises to open doors to global business with a more streamlined, transparent, modern approach to accounting. If you haven’t prepared for the December deadline yet, now is the time to prioritize ASC 606 compliance and begin an era of better accounting at your business.
Eric Dowdell is the global head of trade credit at Dun & Bradstreet, the global leader in commercial data, analytics, and insights for businesses. An MBA graduate of Duke University’s Fuqua School of Business, Eric leads Dun & Bradstreet’s largest line of business with the belief that credit is not only an operational necessity, but also a key growth opportunity for today’s top companies.