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Target or IPO candidate unprepared? Complying with new revenue accounting standards may take “brute force”

14 November, 2017

Dusty Stallings
Deals Partner, Capital Markets & Accounting Advisory Services, PwC US

Accounting considerations aren’t often top-of-mind for deal makers, but 2018 may be different. This will be the first year that public companies must comply with a new set of revenue recognition accounting standards — ASC 606 and IFRS 15. Acquirers of private companies or those with initial public offerings (IPOs) that that are not prepared for the revenue recognition change may need to consider extreme measures to comply.

In an ideal environment, many companies would probably opt for an automated system to produce the reporting required under the new revenue accounting standards. However, for those that cannot effectively implement an automated revenue system by their required deadline, a “brute force,” manual approach may be needed.

This approach can be a combination of human-managed processes and enabling technology and tools, such as spreadsheets or a tactical database solution that supplement existing systems and processes to achieve near-term compliance with the new revenue recognition standards. While there is an increased risk in a brute force approach because of its manual nature, some companies may find no other feasible solution in the short term.

As companies move forward on this path, a few key considerations should help with both the implementation and the ultimate transition to a more permanent solution.

Understand that a brute force solution comes with complexities

Implementing the new revenue standards requires navigating accounting, operational, and data complexities as well as the management of resource constraints and competing simultaneous priorities. Capitalizing the costs to obtain a contract (i.e., commissions), calculating stand-alone selling prices, and estimating variable consideration are complex areas affected by the new revenue recognition model, and these are critical accounting areas that companies need to get right. Furthermore, depending on the adoption method, it may take significant effort to quantify the impacts of the new standard to retrospective periods and calculate the opening balance sheet adjustments.

Data gathering and analysis can be complicated. The new revenue recognition model touches many aspects of the quote-to-cash process, and involves gathering the required data across that process to meet the new standards’ requirements. Many companies are spending significant time on gathering data, qualifying data and establishing controls around the data source, as part of the implementation process. Data gathering can be especially time-consuming, because in some cases, historical data may not be readily available due to changes in enterprise resource planning, historical operational processes, or mergers and acquisitions.

Consider brute force as an interim solution

Because a manual approach can involve higher risk of human error and resource requirements, it shouldn’t be considered a replacement for a sustainable long-term solution, but rather an interim approach or a necessary complement to it.

Companies should consider a structure that will help them progress toward a more permanent, automated solution even while implementing a partially manual approach. In other words, if you take on a brute force method, simultaneously think through a plan that addresses compliance in a more sustainable manner. The potential synergies between an interim manual solution and automated revenue management systems include identifying and prioritizing processing capabilities, transaction scoping, and assessing existing data.

Additional thoughts

Given the level of change required by the new standard, external auditors and audit committees should be involved early on with the overall adoption change approach – especially in a highly manual environment. It is vital to demonstrate to external auditors that there are adequate controls around manual processes and that these controls (including spreadsheet controls) are designed and operating effectively. This will greatly impact the extent of substantive work needed as part of the audit process. Managing internal and external forces to implement a brute force solution ensures this interim measure brings the organization into compliance – just in the nick of time.

For more detailed guidance on this topic from PwC, download: The ASC 606 clock is ticking: It may be time for brute force.