The Financial Accounting Standards Board’s (“FASB”) Topic ASC 606 Revenue Recognition from Contracts with Customers, which at one time seemed as though it might never come into effect, is now at our doorstep. While a few brave souls adopted the standard early in 2017, required transitions are coming for public companies in the first quarter of 2018 and in 2019 for privately held companies. This means that if you have not already started to plan your transition to ASC Topic 606, now is the time.
This daunting and somewhat stressful change in accounting practices can be broken down into processes and phases to help you understand and plan for the impacts of Topic 606 so that there are no surprises to you, your management team, or your board. We have successfully worked with a few of the early adopters of ASC 606, and want to share with you some of the practical lessons learned during the process.
Lesson 1: Know Your Customer Contracts
Contractual terms are always a critical piece of revenue recognition, but Topic 606 revenue from contracts with customers requires a fresh look at your contracts. Before you analyze contracts with the new model in mind, consider if your contractual terms are standardized or if many of your customers are receiving customized terms.
- Start at the product line level and move on from there; what changes and what stays the same in your contracts? Consider changes in the deliverables, timing of delivery, pricing, and other items like termination and refund rights.
- Are any engagements completely customized? Even if you have “one-off” contracts, how might revenue recognition change? How many one-off contracts are there and how do they differ? The answer could be surprising!
- As you review your contracts, look out for what Topic 606 refers to as variable consideration, which is widely used and one of the more significant changes from the current model. Pay special attention to volume discounts, rebates, and contingent fees/holdbacks.
Understand the consequences of these variations as you analyze the transition. If you are adopting ASC Topic 606 in 2019, starting this project now means that you may be able to rewrite future contracts to avoid or mitigate unwanted complexities or deferrals of revenue.
You should also consider existing internal controls surrounding contract approval and modifications and how these controls may play a role in the transition. Are there existing controls in place so that variations are not missed in the transition? If not, consider what controls can be implemented prior to adoption.
There will likely be (and should be!) individuals involved in your Topic 606 adoption process that are from outside of accounting because their knowledge of your customers, contracts and deliverables is vital. Make sure to document which contracts were reviewed directly by the team, what similarities or differences were found, and who helped in the process. Your contract review team will be an ongoing resource throughout the transition.
Lesson 2: Don’t Go it Alone
Questions about where to focus? Confused if your conclusions are adequately supported? Resources abound to help you get there. If reading all 700+ pages of an accounting standard is not your preferred learning method, remember that there are numerous resources created for this transition, such as:
- The FASB created the Joint Transition Resource Group (“TRG”), which has regular webinars and guidance you can access here.
- Compare your results to the 10-K of early adopters in your industry – take examples from the EDGAR page on the U.S. Securities and Exchange Commission’s website.
- The American Institute of CPAs (“AICPA”) has formed 16 industry task forces to develop accounting guidance for revenue recognition – learn more here.
Most importantly, consult your CPA or trusted advisor to review your conclusions before the adoption deadline.
Lesson 3: Have a Timeline
The sooner you start the implementation process, the better off you, your management team and your board will be from day one. When it comes to managing the transition, think about these questions:
- Should you set up a task force to manage implementation?
- If so, then who needs to be on that task force, and what is a reasonable timetable for all who are involved?
- When does your management team need to be updated on your preliminary findings and conclusions?
- What are the communication and timeline expectations of your board?
The FASB ASC Topic 606 transition will be here before you know it. To best meet your company’s needs, consider having a sounding board or a third-party available to assist you along the way. Additionally, learn from the early adopters, and let their lessons steer you through the process.