Two of the most significant new regulations the accounting world has seen in over a decade—IFRS 15 and ASC 606—are now fully in force. The deadline to comply with the new revenue recognition standard has come and gone, yet the reality is that many companies are still struggling to figure out how to correctly recognise revenue and avoid the arduous—and embarrassing—chore of having to refile earnings.
Last year, for instance, PwC found that one of its clients, travel software company Datalex, had misstated its revenue because it failed to apply IFRS 15 properly. As a result, the company was forced to restate revenue, and even had to suspend the trading of its shares as it reviewed accounts.
The new accounting regulations are becoming more applicable and important, especially as an increasing number of organisations engage in more complex and subscription-based business models. For these businesses in the new services economy, calculating revenue and expenses according to the IFRS 15 guidelines can be quite complicated as contracts and pricing models tend to change frequently.
Overcoming the Obstacles
To achieve compliance with the new accounting standards, organisations must first address the following three challenges:
Assess your primary revenue streams to identify where revenue recognition changes are required
As organisations make the transition to IFRS 15, they need to evaluate how the new standard will affect their company. Start by taking a close look at your primary revenue streams and key contracts to identify where the revenue recognition changes could have the greatest impact. Ask yourself several key questions: What does IFRS 15 do to my revenue recognition profile? Do I need to change the design of my customer contracts? Can my sales process remain as it is, or does it need an overhaul?
Assemble the right team, plan, and budget
It’s imperative to have the necessary people and systems in place. For instance, you’ll need a team that can thoroughly evaluate your contracts and draft new policies based on their assessment of those contracts. You’ll also need enough manpower to manage the more complex revenue scenarios such as multiple revenue streams and contract modifications. And, when it comes to budgeting, you should consider creating a method for systematically gathering, reviewing, and disclosing information about performance obligations, including resources consumed, labour hours expended, and costs incurred.
Deliver the right reports to stakeholders
Delivering the right reports, both internally and externally, is absolutely crucial to passing an audit and achieving compliance with the new revenue recognition standards. The challenge here is that many organisations still use manual approaches to reporting. Spreadsheets, in particular, are ill-suited to complex revenue-recognition reporting because they are inefficient, error-prone and notoriously difficult to audit. In fact, the European Spreadsheet Risks Interest Group found that 50% of spreadsheet models used in large businesses have material defects. The reason why they are so frequently used is because many legacy ERP systems simply cannot deliver what is required. Traditional old-school ERP systems were designed for a different era when services were not as important and are not flexible enough to respond to changing market demands.
New solutions for new rules
What organisations need is a reliable solution to help them comply with the new standards—one that can handle the demands of more complex revenue-recognition reporting requirements. The good news is that new cloud solutions have been designed from the outset to support the needs of services businesses. The right cloud application can enable organisations to make more informed business decisions without relying on outdated, error-prone technologies.
Here are four ways that cloud technology can put actionable information at your fingertips and help you make the best choices for your business.
Powerful data models: Unlike traditional spreadsheets, the right cloud solution can quickly and effortlessly recognize revenue from multiple sources, including directly from sales opportunities, orders, contracts, projects, and invoices. The net result is better automation and flexibility across your revenue recognition processes.
Seamless integration: The best cloud applications can tap into the potency of your existing platforms, such as Salesforce, and integrate directly with other mission-critical applications, including financial management and professional services automation. This tight integration can help ease the process of transitioning to a new accounting model.
Configurable templates: Look for a cloud tool that can adapt to your business and create specific rules based on how you want to recognize revenue going forward. This means you can track various revenue streams, automate allocations, and configure different rules and templates—all while eliminating your reliance on spreadsheets.
Robust forecasting capabilities. Your cloud application should enable you to do forecasting based on multiple revenue source data. This allows you to make changes to contracts and billing terms quickly and easily, while gaining a 360-degree view of your business.
IFRS 15 and ASC 606 are not just accounting regulations. These new standards represent an opportunity for organisations to upgrade their operations by shedding manual processes and replacing them with cloud-based systems that enable them to better compete in the digital economy. There’s never been a more opportune time to the ditch the spreadsheet and transform your business for the better.
Andy Campbell, Solution Evangelist at FinancialForce