Accelerating IT Planning for Revenue Recognition Changes

The myriad of industry-specific guidance made the full automation of revenue accounting too unique and complex a problem for ERP vendors to solve.
Jeff Johnson and John McGawFebruary 8, 2016
Accelerating IT Planning for Revenue Recognition Changes

Enterprise resource planning systems are challenging to implement, and once implemented, there’s a constant need for updates and changes based on a company’s internal and external circumstances. Most often, business changes can be anticipated in advance, and with proper upfront preparation, the related system changes can be planned for and funded through multiyear IT portfolio planning.

However, it’s becoming increasingly difficult to adequately plan for regulatory changes like those we are experiencing in the world of external financial reporting. For the many organizations that will experience a significant impact from the upcoming changes in revenue recognition and lease accounting, meaningful disruption to their IT portfolio and corresponding financial plans may be inevitable. So how can organizations get in front of these changes and minimize the disturbance to ongoing IT plans?

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Historically, ERP systems were generally not designed to perform complex revenue accounting. Rather, their functionality focused on fulfilling orders and generating invoices in the order-to-cash process. During the last 15 years, many ERP vendors added functionality to ratably recognize revenue over a period of time and even defer revenue recognition until a specified event was recorded in the system.

However, most have not provided advanced functionality to accommodate changes introduced by SOP 97-2[1], EITF 08-1, or other revenue accounting changes. Who can blame them? The myriad of industry-specific guidance made the full automation of revenue accounting a problem too unique and complex for ERP vendors to universally solve. The result is that most organizations choose to let their ERP system do the best it can and supplement with spreadsheets or homegrown solutions to solve what the ERP system cannot – not the most efficient method. It is common to find organizations recording a significant portion of their revenue transactions using non-ERP source systems.

Looking forward, let’s consider the new revenue recognition standard that was issued in May 2014 which will impact some organizations more extensively than it will others. It has taken more than a year for leading organizations to develop their technical accounting point of view, and the vast majority of them has yet to evaluate the impact on their business processes and ERP systems. Moderately to highly impacted entities continue to work through the challenge of developing blueprints to “operationalize complex accounting” so that ERP systems can record revenue, as well as related costs and disclosures under the new guidance.

In addition to developing an efficient and well-controlled Day 2 environment, companies also face the need to determine an adoption strategy for the quarterly and annual transition periods requiring concurrent old and new methods of revenue accounting (for example, recasting prior-year results for full retrospective adoption or performing dual accounting in the year of adoption for modified retrospective adoption footnote disclosures).

Jeff Johnson

Jeff Johnson

Other difficulties may include implementing the changes for beginning-of-the-year transactions under the new standard in the year of adoption while still closing the books of the prior year under the old accounting guidance. Clearly, companies are realizing the challenge will not be solved by a couple of their bright accounting staff working a few long nights and weekends to devise a new spreadsheet. This problem is far more complex and affects downstream systems used for management reporting, financial planning and, potentially, other functions dependent upon revenue data.

Assuming new revenue recognition standard adoption in 2018, organizations should already be identifying their open contracts as of the beginning of this fiscal year if they are strongly considering using the full retrospective approach. If companies want to limit the extent to which they have to retrace their steps in 2018, plans and programs should be in place during the current year to perform and record revenue accounting for both current and future GAAP.

To avoid having to completely account for transactions retroactively, IT organizations should have researched new software solutions that entered the market in the past year to provide new revenue recognition functionality. Those teams should be readying to deploy projects to define and develop the system and business process changes necessary to automate the accounting for the new standard.

Unfortunately, most organizations are not yet this far along. And for some, significant changes to or reductions in their existing multiyear IT portfolio plan will be required to accommodate the budget and resource commitments required to support the changes.

John McGaw

John McGaw

In this environment of required accounting change, meaningful analysis, research, and planning needs to take place to allow the planning functions adequate time to assess and incorporate the impact into their multiyear IT plans. Ideally, organizations would have assessed and understood the probable outcomes of the new revenue recognition standard before or soon after it was issued.

For organizations anticipating a moderate to significant impact, including those already having a considerable volume of offline revenue accounting under today’s standard, plans and budgets should be in place and ERP solutions should have been evaluated for the automation of revenue accounting. The evolving and complex implementation landscape and competing priorities, however, have made this difficult. As a result, organizations that have not yet developed their plans may have to increase their offline solutions and require staff to operate them until an automated solution can be implemented. Perhaps more concerning, existing discretionary IT projects may need to be deferred or even canceled as IT resources are redirected to the regulatory mandate.

In addition to the challenge of new revenue recognition standards, organizations will ahve to deal with the soon-to-be-issued new leases standard. Many organizations use a spreadsheet-based approach for the financial reporting and disclosure of their operating leases. The new leases standard will likely require companies to do more than simply convert their existing spreadsheets to account for lease assets and liabilities. And like revenue recognition automation, the prepared are more likely to be rewarded with effective and efficient solutions that align to ongoing IT plans rather than disrupt them.

John McGaw is a partner and leader of EY’s Americas accounting change program. John’s primary responsibilities are advising global organizations on leading practices with respect to effectively and efficiently mitigating their organizations’ financial reporting, operational, and compliance risks associated with accounting standards evolution, M&A activity, and other business change events. Jeff Johnson is an executive director in EY’s performance Improvement advisory practice. He has provided technology enablement services to automate transaction processing and deliver resulting analytics to clients for more than twenty-five years.

The opinions expressed herein are those of the authors and do not necessarily reflect the views of the global EY organization or its member firms.

[1] : AICPA Accounting Statement of Position 97-2, Software Revenue Recognition – currently codified as ASC 985-605, Software – Revenue Recognition