For most businesses, the new revenue accounting regulations approved by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) will go into effect at the end of this year. These standards specifically relate to revenue associated with customer contracts of goods and services.
“The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers.”
Although these changes are not yet in place, that doesn’t mean you want to get caught unprepared for them. In fact, the key stakeholders and decision makers within your organization should be preparing right now for the changes. This is critically important because these new standards will likely have an impact on both how and when revenue is recognized.
Unfortunately, many are not prepared.
A survey conducted in the fourth quarter of 2016 by PwC and the Financial Education Research Foundation (FERF) found “75 percent of companies haven’t completed an initial assessment of the standard’s effect, and nearly 27 percent of respondents haven’t started the assessment process.”
If your business falls into one of these two groups, the time to start planning is now. In this post, I want to take you through a few best practices you can put in place to ensure your organization will be prepared for the new standards.
Get All Departments on Board
With these new standards, it isn’t just the finance department that must be aware of the changes. Businesses will need to coordinate between multiple departments. The IT team will need to know about any changes to systems and monitoring and the sales team will need to keep track of customer satisfaction, for example.
Without cross-company cooperation, it’s likely information will fall through the cracks which means revenue could be reported incorrectly. Obviously, that is something you want to avoid.
Perform an Impact Assessment
Once the management team is on board, one of the next steps you should consider is to perform an impact assessment. Keep in mind, everything from point-of-sale transactions to rebate programs to royalty agreements and long-term contracts may all be impacted.
It’s very likely that the way you currently recognize revenue will change. For some businesses, the change may be minor while others will have major adjustments to their current models. Know ahead of time what the impact will be on your organization so you can plan effectively.
Develop an Audit Committee
One way businesses can respond to the revenue recognition changes and standards is to create an audit committee. This way, the committee will be comprised of key members in the process who can provide guidance and oversight.
The audit committee can evaluate the impact assessments, get management ready for the process and coordinate with internal auditors, outside counsel and consultants.
Establish Process Milestones
As the next few months roll by, it is important your management team have a system in place to implement the changes that your organization will need to make.
No doubt, depending on how these changes impact your business, the process can be quite complex. To ensure things run smoothly, set up a plan that has established milestones. Then everyone involved knows exactly where they are in the process and the information that needs to be provided at set times.
Although time is ticking before the revenue recognition changes and standards fully go into effect, having a thought-out plan is key. When you can get all the key stakeholders on the same page, what is likely to be a complex process will run more efficiently.
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