Is your company prepared to operate successfully under 606?
Over the last year and a half, public companies, companies that aspire to go public, and many other companies that just want to be GAAP compliant have been very deliberate and diligent about complying with ASC 606. That’s good. The bulk of the ASC 606 implementation and compliance work has been done via a collaborative effort – including public accounting firms of various sizes, international, national and regional, as well as companies’ more technical accounting Executives, Directors, and Managers. This has put us in a position where many companies are technically compliant and have a technically appropriate approach to Revenue Recognition.
However, that is not the end of the work that will have to be done to allow companies to operate successfully under 606. By “successfully,” we mean in a scalable, operationally efficient manner.
The reason for this is Stage 1 of ASC 606 Compliance has been about getting compliant. That’s based on the company’s current systems environment, product mix, customer mix, and the various revenue elements that they have in their current product mix. Most companies have either come up with a programmatic approach that will work well based on their current operations size, structure, and mix – using tools like Excel. Or they’re trying to engineer the calculus into their existing enterprise resource planning software.
We think this is just Phase 1 of a much more challenging, technically driven, and longer-team effort.
The key point is that all those companies who believe they have implemented ASC 606 may have done so. However, while they might be in compliance with 606 today, we believe the future state of their implementation will be vastly different different.
The Issue at Hand
The problem with most of the implementation efforts to date is that while technically correct, they have been primarily driven by technical and project management support firms. Those firms’ expertise is in audit and technical compliance and may not always encompass best-in-class operationalization of accounting pronouncements. That means bad news: this is probably not the end of the work for most companies.
The Good News
The good news is that there are technology solutions that have been developed and purpose-built for companies with moderately complex to complex revenue recognition issues. Companies that have been through the first wave of compliance and implementation should be thinking critically about two things:
1. What are the conceivable changes that are going to happen in their business?
- Will they be adding new products?
- Will they be bundling products differently?
- Will they be changing the componentry of the service, hardware, software and of other revenue elements?
- How might the structure of their contracts change?
For example, many of our historically service-plus-software clients are working to become pure-play software companies, but they are not there yet. Questions for these companies include:
- What other products will they add?
- Will they be making acquisitions?
- What acquisitions are in consideration right now?
- How complex are the revenue recognition issues that those prospective acquisitions face?
2. What role will technology play in maintaining their ASC 606 compliance?
All responsible companies should be looking actively at available software solutions to make operationalizing their compliance painless, scalable and as adaptive as possible to future changes. These changes might come in the shape and strategy of their business or what their companies might look like post-acquisition (if they are looking at acquisitions).
Some major ERP providers have bolt-on solutions they have designed to attempt to solve this problem, and some of these solutions work. There are also several purpose-built solutions that are specifically designated for revenue recognition purposes. Softrax is one such example. RevPro, a product owned by Zuora, is another option.
What’s Our Point?
We want to be sure our customers, prospective customers, and the broader technical accounting community are not operating under the idea that their 606 compliance work is over.
Rather, they have completed the first phase of that work. They must understand the next phase of that work is to more creatively contemplate their future and the future of their enterprise. They must continue thinking about revenue recognition within the context of new lines of business, changes in existing lines of business, integration of acquisitions and so on. Within that context, they must start actively evaluating software options that are in the market today.
We are more than happy to help our clients with this analysis and planning, and to help them focus on what’s important. I’m reminded that people used to think that the preparatory work to go from being a private company to a public company was the big lift. Well, the reality is that the big lift of a public company is not going public; it’s all the burdens imposed of being a public company. It’s not just the quarterly reporting cadence, but the need for extremely spot on EPS forecasts that need to be updated on almost a constant basis and so on.
The same thing applies now with ASC 606. Whatever work has been done so far is useful, but it will not be the end of the work required to have a functioning, 606-compliant operation.
We offer post-ASC 606 implementation support and planning under our financial reporting and accounting services. You can also download our free whitepaper to learn more about speeding up your reporting processes.
About the Author
David Lewis has been the CEO or founding partner of 5 companies, including a 600-person family business, three successful startups, and a venture capital-backed software development firm. His last startup scaled to a 300 person consulting and executive services firm that served companies ranging from Fortune 500 firms to venture-backed startups. David has deep functional expertise in the creation and implementation of accountability systems, planning, finance, talent acquisition, and executive coaching. David is currently the CEO of 8020 Consulting which applies its team’s intellectual capital, technical expertise, and energy to address a range of financial projects for clients ranging from Fortune 50 companies to middle-market and venture-backed firms.