ASC 606 and IFRS 15: Are you Ready for New Revenue Recognition Rules?

We don’t want to add more to your to do list as things get busy around the holidays, but this is important! By now you’ve heard about the new rules governing revenue recognition for companies that will go into effect on January 1, 2018 for public companies, and January 1, 2019 for private firms. To recap, listen in to our podcast where I speak with Microsoft about the details.

ASC606 Overview

The Accounting Standard Codification 606, or ASC 606, made its debut in May 2014. It is an industry-neutral revenue recognition model designed to increase financial statement comparability among companies and industries. The objective is to decrease complexity involved with the current models for revenue recognition.

As a result, the new unit of account for revenue recognition is the obligation of a good or a service at the time it is delivered.

The Financial Accounting Standards Board (FASB), which administers Generally Accepted Accounting Principles in the U.S. (US-GAAP) has issued ASC 606, and the International Accounting Standards Board (IASB), which administers International Financial Reporting Standards (IFRS) used in most other countries, has issued IFRS 15. Both will enforce similar, fundamental changes to the revenue recognition process for any company that depends on complex contracts in their dealings with customers.

How do I know if my company will be impacted by ASC 606 and IFRS 15?

Businesses that have multiple components (e.g., product, services, warranties, etc.) in a single contract are the most impacted. If your firm permits changes to active contracts (e.g., adding a sports package to your cable TV contract), they are impacted. If the timing of when your firm pays commissions differs from when the products and services are delivered, then your firm is impacted. Cellular phone companies, software firms and many other kinds of companies will be impacted – some far more so than others.

 

 

Not Managed by Microsoft Dynamics out of the Box

Microsoft Dynamics does not manage these new standards out of the box. Companies running Dynamics GP, NAV, AX, or 365, must take all of their revenue outside ERP, process these complex calculations to figure out what they can recognize today versus what is deferred, and then bring those back in as manual journal entries. Before you start using Excel for this, consider using AXIO for Enterprise Firms, and Progressus for Small to Medium-sized Firms in addition to Microsoft Dynamics.

We wish you the best of luck with these new standards. Please let us know if you have any questions, and Happy Thanksgiving!

Best regards,

Robbie Morrison
Chief Solution Strategist, SBS Group

About Robbie
Robbie Morrison has spent nearly 20 years helping customers build and deploy elegant technology and business solutions.  From start-ups to enterprise-class organizations worldwide, his knowledge of the Microsoft Dynamics ecosystem and Robbie-2017products helps SBS Group customers maximize ROI on technology investments.

Today, Robbie serves SBS Group customers in his role as Chief Solution Strategist where he provides thought leadership and manages the development of B2B solutions.  Robbie received his MBA from the University of Georgia, Terry College of Business.
https://www.linkedin.com/in/robbiemorrison

 

Will you be ready for the impact ASC 606 and IFRS 15 will have on your business?

“Why all the fuss?  These changes don’t really take effect until 2018.  Plenty of time. Right?”

Wrong.  If you’re a professional services firm or deal with complex contracts or recurring contracts of any kind then you definitely don’t want to take the “plenty of time” approach to ASC 606 and IFRS 15.

It is true that the new rules governing revenue recognition for contracts will go into effect for most companies in 2018. The Financial Accounting Standards Board (FASB), which administers Generally Accepted Accounting Principles in the U.S. (US-GAAP) has issued ASC 606, and the International Accounting Standards Board (IASB), which administers International Financial Reporting Standards (IFRS) used in most other countries, has issued IFRS 15. Both will enforce similar, fundamental changes to the revenue recognition process for any company that depends on complex contracts in their dealings with customers.

ASC 606 and IFRS 15 Steps

How do I know if my company will be impacted by ASC 606 and IFRS 15?

As you can imagine, this will include just about every business services firm from accounting to engineering, technology services and business consulting.  Any organization that accepts complex contracts for projects to be delivered over a period of time will need to get their house in order.  Stops there?  Not at all.  In today’s digital world, there are scads of hi-tech firms that sell software or other technology services on a subscription basis. Wait for it … “in the cloud”.  Subscription software sales often come with recurring contracts that are structured using tiered pricing or volume discounts or routinely involve modifications, such as adding or dropping users, or that allow buyers to increase/decrease services seasonally.

The list is long and if you’re reading this post, you’re more than likely working for a company that will need to make preparations sooner than later. If so, you may want to listen to a podcast for professional services companies we hosted recently where experts from Microsoft and SBS Group discuss contract management and revenue recognition for companies using Microsoft Dynamics AX.

The bottom line is that revenue recognition has evolved into a complex and confusing set of regulations and requirements which tend to vary in practice from industry to industry and country to country.  Acquiring a new single core accounting standards principle guideline is part of the FASB’s goal of converging US GAAP with International Financial Reporting Standards (IFRS).  Ultimately, IFRS and US GAAP will share the same guidance on revenue recognition, substantially eliminating most differences.

What really changes with ASC 606 and IFRS 15?

The most notable change from ASC 606 and IFRS 15 will be in how revenue (and some corresponding expenses) related to complex contracts is recognized.  Meeting specific “performance obligations” will be the measure by which customers are considered to be satisfied.   Only when customers are satisfied, rather than when internally measurable events occur (such as delivery, completion of milestones or the passage of time) can revenue be recognized.

Think about that for a moment.  This isn’t just an accounting standards change for the bean counters in your company.  This will impact everyone from sales through delivery.  Why?  In many firms, this will create a variance in “when” revenue happens that doesn’t necessarily align with historic performance to plans or budgets.  You may sell it in January and deliver 80% of services shortly thereafter, but until the performance obligations are met…no revenue recognition.  Executives will need to sort out actual-vs.-plan variances caused purely by accounting events such as a failure to receive documentation to trigger recognition, and those that reflect “real” events such as a shortfall in sales or labor overruns.  Even timing of sales commissions or other incentives tied to recognized revenue will be impacted.  Everyone gets to play.

Organizational Impact ASC 606 and IFRS 15

 

When and how should we prepare for ASC 606 and IFRS 15?

The new revenue recognition accounting standards supersede most existing industry- and transaction-specific guidance. Its purpose is to improve the revenue recognition portion of financial statements and increase the consistency of financial reporting globally.

U.S. filers are expected to adopt the new accounting standards their first reporting period after December 15, 2017. However, they have the option to adopt ASC 606 one year earlier than the requirement. For most companies, financial statements released in 2018 will be the first in compliance with ASC 606. In order to ease the transition, the Boards allow filers to use practical expedients in their application of the new accounting standards and choose between two adoption methods (full- and modified-retrospective).

Regardless of deadlines set by the accounting standards boards, if you are a project-driven business or you rely on complex contracts or recurring contracts of any kind to generate revenue, the time to prepare is now.  Adapting processes, updating or replacing software and updating forecasting models don’t happen overnight.  Certainly not at the last minute.

SBS Group customers leveraging our AXIO solution for Microsoft Dynamics AX already have the necessary tools in place and most will experience a smooth transition.  Our solution uniquely addresses the complexities of project-based businesses. AXIO for Professional Services spans all the important processes in your firm – resource management, project management, marketing, human capital management, and financial management – to give you unparalleled insight and control of all of your critical business functions. Built on the Microsoft Dynamics AX platform, it is optimized for cloud, on premise, or hybrid deployment. Dynamics AX provides proven global scalability and enterprise-class extensibility and AXIO is compliant with all GAAP, IFRS, Sarbanes-Oxley, and DCAA requirements.

AXIO Contracts And Revenue Management Workspace.png

AXIO Contracts and Revenue Management Workspace for Microsoft Dynamics AX

Many companies, even those with enterprise ERP and high-end forecasting tools, will need to build a plan to implement process updates and retool the development of complex contracts.  Firms relying entirely on Excel or outdated planning and project management solutions may find the need to purchase and implement new software even before other processes can be adapted.  It will take a comprehensive, collaborative effort to realign business planning and budgeting as your back office team adapts to these new accounting standards.

If your company is considering or currently using Microsoft Dynamics AX and would like to spend time with an accounting and technology expert from SBS to better understand the impact of ASC 606 or IFRS 15, please reach out through our website today.

Check it out yourself by attending one of our educational webcasts. Click here for webcast times and registration.

Thanks for reading and I hope you the best in your transition to the new ASC 606 and IFRS 15 standards!

Sreepathy Nagarajan

Senior Solutions Consultant
SBS Group

 

Advanced Contract Management in Dynamics AX is a Breeze for High Tech Services Firms with AXIO

Ok, so “breeze” might be pushing it, but every high tech services firm knows that managing long-term contracts and accurate revenue recognition is anything but easy with even the best of software at your disposal. However, the right technology coupled with proven best practices and careful execution can minimize risk, improve the customer experience and substantially reduce revenue leakage.

What kind of advanced contract management are we talking about?

Whether focused on public or private sector, B2B or B2C, High Tech services firms revolve around software, hardware and services contracts that must be in place to generate and accurately recognize revenue. Even simple contracts require consistent tracking and the flexibility to adapt as relationships, requirements and timelines evolve. More often than not, hit tech firms are dealing with “multi-element arrangements” that incorporate both products and services in the same contract with different delivery obligations and rules for revenue recognition.

Technology Services: Professional services firms that provide infrastructure and security services or implement business software solutions like ERP (enterprise resource planning) or CRM (customer relationship) may spend months or even years on a single project. Services rendered as a part of the project will be billed as delivered and often according to pre-determined milestones and obligations.

Licensing, renewals and warranties: Effectively managing contract entitlements, usage, software licenses, warranty costs and renewals are essential to profitability. High Tech Services firms and software publishers who provide warranty, service or license solutions, must meet their customer obligations in order to ensure the continued revenue stream these services offer. As the market for subscription-based software (SaaS) continues to grow, most High Tech services firms find themselves struggling with cash flow fluctuations and an inability to quickly adapt contracts to changing customer requirements.

Can’t Microsoft Dynamics AX handle Advanced Contract Management?

Mostly, yes. Microsoft Dynamics AX is designed to handle thousands of business processes natively (without further customization), but it is also built on an extremely flexible architecture that allows 3rd party developers to create custom solutions that meet the unique needs of large, enterprise companies. In this case, it is the advanced contract management and revenue recognition needs of High Tech Services firms that require a custom solution.

Advanced Contract Management Performance Criteria based on Aberdeen Group Study in July of 2015

SBS Group provides an advanced Contract Management tool set as part of AXIO for Professional Services, an enterprise suite that tailors Microsoft Dynamics AX to the needs of high tech and other professional services organizations. AXIO allows customers to streamline the creation and management of subscription-based and fixed-price engagement based contracts and to configure and manage contracts from discovery and negotiation through acceptance and delivery. Integrations with 3rd party quote management applications like BigMachines are available to simplify data sharing.

 

Below is a more comprehensive overview of the enhancements available only through SBS AXIO for Professional Services:

> Advanced Billing Management
Business are able to set up complex billing rules and allocations to manage split funding scenarios and configure various billing frequencies (monthly, quarterly, etc…) and billing cycles such as up-front or in-arrears

> Advanced Revenue Recognition Functionality
Subscription-based projects are becoming more prevalent every day in the High Tech Services sector so automated revenue recognition functionality on fixed price and subscription based project is extremely important, as the automatic reversal of accruals upon invoicing.

> Comprehensive Contract Renewals
Contracts can be renewed based on percentage, flat amount or even index-based contract amount increases and can be applied to different renewal types such as automatic, linear and non-linear based renewals. It will even generate renewals letters and distributions for customers automatically.

> Automated Contract Realignment
Complex projects often require adjustments to the contract during the tenure of the contract. We’ve made it easy to change both the contract amount as well as tenure, but most importantly the revenue recognition and billing cycles are automatically adjusted as well.

> Contract Re-parenting
This is a personal favorite of mine as it can save an enormous amount of time for customers and provides a level of flexibility you just don’t get in Dynamics AX out of the box. When companies are consolidated or divested, contracts can be moved (re-parented) easily and with history tracked for auditing purposes.

> Advanced Invoice Distribution
The advanced invoice distribution framework allows SBS customers to set up multiple contacts to receive invoice copies to be automatically distributed upon invoice generation. Again, a complete audit trail is created to create a clear chronology of invoice distribution history across all contracts.

Minimizing Revenue Leakage

A significant reduction in revenue leakage alone is more than enough to justify an investment in an integrated, user-friendly contracts management system.  By reducing mistakes and billing more frequently, professional services firms are able to decrease DSO and prevent hours from going missing.
We see this most frequently with high-growth technology services providers.  Best practices are often not employed.  Rather, silo’d systems and excel spreadsheets rule the day.  Consultants and other billable resources cling to their own processes and tend to categorize hours and projects differently.  When contracts are negotiated, terms and definitions are often tailored to the customer or project.  The right system will help to enforce contract policies and provide transparency across stakeholders to avoid misunderstandings and conflicts.
There is simply no question that improving billing accuracy ultimately drives quicker payments and better decision-making for both the customer and service provider.

 

high tech services firms must deal with revenue recognition compliance differently in 2016

What about new IFRS 15 standards and Dynamics AX?

Microsoft Dynamics AX is certainly capable of managing to the new standards but without AXIO, the process is much more cumbersome and more prone to user error in the High Tech services sector due to the inherent complexity of long-term project contracts as described earlier in this post.

Change in regulatory standards and compliance requirements are always a concern for hi-tech firms, especially those doing business with public sector entities (government contractors). However, regulatory compliance and Gaap can apply to anyone. If you’re not ready to support the expanded requirements from the new GAAP and IFRS standards, including ASC 606 and IFRS 15, you should be.

IFRS 15, effective for annual periods beginning on or after 1 January 2017, specifies the requirements an entity must apply to measure and recognize revenue and the related cash flows. The core principle of the standard is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring promised goods or services to a customer.

The principles in IFRS 15 are applied using the following five steps:

  1. Identify the contract(s) with a customer
  2. Identify the performance obligations in the contract(s)
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations
  5. Recognize revenue when (or as) the entity satisfies each performance obligation

Technology entities will need to exercise judgement when considering the terms of the contract(s) and all relevant facts and circumstances, including implied contract terms. An entity will also have to apply the requirements of IFRS 15 consistently to contracts with similar characteristics and in similar circumstances. On both an interim and annual basis, an entity will generally need to disclose more information than it does under current IFRS. Annual disclosures will include qualitative and quantitative information about the entity’s contracts with customers, significant judgements made (and changes in those judgements) and contract cost assets.

New Revenue Recognition Standard Effective Dates

New Revenue Recognition Standard Effective Dates ASC 606

IFRS 15 effective for annual periods beginning on or after 1 January 2017. Early adoption is permitted for IFRS preparers and first-time adopters of IFRS.

The effective date of the standard for public entities applying US GAAP is for fiscal years beginning after 15 December 2016, which is essentially the same as for IFRS preparers. However, US public entities will not be permitted to early adopt the standard.

Click here to read about this on the FASB website.

Is advanced contract management only applicable to Hi-Tech Services Firms?

Not at all. Any company dealing with complex contracting or recurring revenue recognition needs a cost-effective way to lower risks in advanced contract management and ensure they’re maximizing revenue. AXIO for Professional Services was developed by SBS Group to help services companies operate more efficiently, but we’re finding that manufacturing, distribution and construction companies are just as excited when they see AXIO in action.

 

 


Check it out yourself by attending this educational Dynamics AX webcast on June 15th at 1 PM EDT. Register here!


 

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