As any finance type well knows, the Financial Accounting Standards Board and the International Accounting Standards Board have issued their new revenue recognition changes (ASC606/IFRS 15), marking some of the most significant regulatory reforms to accounting standards in the last 20 years.
There are plenty of questions about the potential impact of the regulations and how to best prepare for them. And deadlines are fast approaching—January 2018 for calendar year-end public companies and January 2019 for calendar year-end private companies.
Still, a recent PwC revenue recognition survey found 65% of respondents remain in the assessment phase, and 22% haven’t even started the process. PwC also emphasizes that the impact of 606 will reverberate well outside of just accounting standards: “The impacts of the new standard extend far beyond technical accounting. Change to the way revenue is recognized will have broader impacts on other areas of the business, including go-to-market strategies, income taxes, compensation arrangements and debt covenants, among others.”
Indeed, the ripple effect of 606 could reach into just about every corner of your organization. As a privately held company, Adaptive Insights has decided it makes sense to adopt the regulations early.
Like us, companies have a decision to make regarding how to adopt 606: full retrospective approach or modified retrospective approach. The full retrospective approach involves a restatement of all comparative periods presented in your financials and recognizing the cumulative effect of 606 at the start of the earliest period presented.
The modified retrospective approach involves presenting the comparative periods in legacy GAAP (i.e., 605) and recognizing the cumulative effect of 606 on the date of the initial application of the new guidance. Under the modified retrospective approach, companies are also required to present the quantitative impact and significant changes between the financials under 606 and legacy GAAP during the period of adoption.
Going through the process early will not only benefit our company but also will provide us with insight that can be useful for our customers. For example, the active planning process—based on modern cloud planning and analysis tools—that we use here at Adaptive Insights can serve as a blueprint to help customers make the transition process as seamless as possible and also possibly gain a competitive edge.
Here are three ways how:
Forecasting two futures
One of the most valuable benefits your FP&A team can add to the 606 process is forecasting capabilities. As you work toward 606 compliance, your company would benefit from seeing what its financial forecast would look like if the new standards were in place. For instance, with an automated planning system, rather than a single-user spreadsheet, you can create two models—a forecast for what financials look like under the 605 regulations and a second forecast projecting the financials under new 606 requirements.
The competitive advantages of this approach are clear. Unlike many of your peers, your management team and key stakeholders will have a far better view of what the future will look like in the 606 world. And these comparative forecasts will not only help inform decision-making but can also help strengthen the bridge between accounting and FP&A. The accounting team’s subject matter expertise can be leveraged to build the 606 forecasting model. In addition, given the high level of judgment in 606 and various alternative treatments and practical expedients available, various what-if scenarios can be built by the FP&A and accounting teams within the automated planning system to better understand the financial impact of various alternatives. This would help management make more informed decisions and improve predictability of the numbers.
Regardless of the route an organization takes with 606 implementation, Adaptive Insights offers a complete platform from modeling to reporting to dashboards to help in the transition. Organizations that opt for the full approach will be able to leverage the Adaptive Suite’s integration platform to quickly bring in restated information and provide the reporting needed to run the company. Organizations that opt for the modified approach will face a potential reporting challenge in that they will not automatically have year-over-year results for comparative analysis and to track trends.
Yet Adaptive Insights offers an easy work-around. Even if you are not going to restate the numbers in your enterprise resource planning system, you can still model them out in the Adaptive Suite. That creates the ability to show leadership and internal stakeholders what the financials look like from a comparative year-over-year perspective. Ultimately, whatever path your organization takes, a fast and easy cloud planning solution can help smooth out the reporting transition associated with 606 changes.
Create better KPIs
As any FP&A pro knows, changing processes tend to have multiple consequences, both those intended and not. A prime example is the potential KPI and key metric impact that will flow from 606 requirement changes. Clearly, some of your key metrics and KPIs will require revision along with accounting standard changes. For instance, important aspects of your business such as how you measure sales productivity will be altered beyond the mere accounting change.
The ability to effectively identify, track, and measure KPIs and then provide visibility via dynamic dashboards will be critical in post-606 era. Armed with fast, easy, and powerful cloud capability, FP&A will be able to add significant strategic value in terms of identifying the right KPIs under 606 standards, and then providing ongoing measurement and analysis that is sure to help make the transition as smooth and successful as possible.
Regardless of where you are in your 606 journey—well along your way, assessing the potential impact, or in flat-out panic mode—your FP&A team can bring real value through leveraging cloud technology and your strategic insights. Change is coming. The time to prepare is now.