Accounting Countdown

IT teams are under pressure as deadline nears for new financial reporting rules.

Most companies are significantly behind in their efforts to meet the impending Jan. 1, 2018, deadline for implementing the Financial Accounting Standards Board’s new revenue recognition standard, according to recent Deloitte survey.

Officially known as Accounting Standard Codification (ASC) 606, the new standard is considered to be one of the most significant changes to U.S. accounting principles in years. Because it alters the way companies must book revenue, it essentially affects any organization that has contracts with customers.

The compliance process has strong implications for IT departments because it involves new ways of collecting, aggregating and reporting data. In most cases, implementing the new standard requires designing and implementing new software solutions and internal controls.

Nearly 70 percent of respondents to the Deloitte poll released in June said their organizations were still assessing how they will implement the new standard.

“Implementing the new standard is fast becoming a fire drill,” said Deloitte consultant Eric Knachel. “From establishing a budget to ensuring proper data collection and testing system modifications, the implementation process requires substantial time and resources. Companies should not underestimate what a significant undertaking implementation will be.”

Far-Reaching Impact

Revenue is a key metric for evaluating a company’s financial performance and prospects. However, the previous U.S. and international standards were different, often resulting in different accounting for transactions that were economically similar. The new standard aims to remove those inconsistencies and ensure that financial statements provide more useful information.

However, the Deloitte survey indicates that most organizations don’t seem to fully understand the reach of the standard. More than half (52 percent) of poll respondents said they do not think the change will have a material impact on their company’s financial statements.

That may be a misreading of the standard, which was initially announced in May 2014. Unlike other accounting standards updates that affect only one or two line items in financial statements and can be taken care of by the accounting division, Deloitte says ASC 606 is a “transformational” rule requiring organization-wide changes that could take many months to implement.

“Companies should recognize that while the standard might not affect balance sheets or income statements in some cases, it can still have a significant impact on related disclosures,” warned Knachel. “A significant risk around revenue disclosures is a potential loss of investor confidence and a decrease in shareholder value.”

IT’s Burden

Although compliance will require significant effort throughout an organization, it seems clear that IT departments will have to do some of the heaviest lifting. As finance departments analyze contracts to determine how they book sales under the new rules, the changes likely will require IT to rewrite old accounting programs, install new applications, upgrade systems and revise internal controls.

These changes will have a cascading effect throughout IT, touching not only accounting systems but ERP, CRM, business intelligence, data warehousing, document management, enterprise application integration and more.

The reporting of financial results has always been a challenge for IT because financial data comes from multiple sources and is difficult to consolidate. Reporting breakdowns often occur when two or more highly autonomous operating units are using different analytical tools and different metrics to generate financial reports.

In some organizations, interpreting and consolidating these reports is typically a manual, spreadsheet-based process that is prone to error. Other organizations utilize business intelligence and data warehousing tools to create proprietary dashboards for merging reports. Either way, those processes must all be redesigned for the new requirements.

Many organizations likely will decide to implement new applications that have been designed for ASC 606 compliance. However, even that won’t be a simple solution. New applications will almost certainly require some customization to fit existing systems and processes. If so, IT must work closely with internal and external auditors to ensure that the customizations don’t bypass any audit-trail controls.

Managing the Change

IT will also have to take the lead in project management. The leading cause of tech implementation failure is poor project management. The IT department must ensure that any new or upgraded financial systems are selected and implemented within defined schedules, budgets and acceptable levels of risk.

Additionally, the project management team must ensure that there are no cross-application issues across departments. Without proper management, it is possible that different business units could wind up using different tools and different metrics — particularly given the easy access to a variety of cloud-based platforms. IT must enforce uniformity across reporting tools to ensure a “single source of the truth.”

Given the size of the job, it seems shocking that 55 percent of the respondents to the Deloitte survey released in June indicated that their company has not started to assess internal controls from a revenue recognition standpoint. Furthermore, 56 percent said their company has yet to establish a budget for implementation.

“Revenue issues are the most common problem underlying accounting enforcement actions,” said Knachel. “The clock is ticking, and it is critical that disclosures, internal control considerations and adequate resources be front and center as companies work to adopt the new standard.”