Implementing Accounting Standards Codification (ASC) 606 will generally require a significant amount of knowledge and time. This article is organized into frequently asked questions and includes guidance for companies implementing internally and for those using a third-party consulting firm. Representatives from two Fortune 100 companies were interviewed in order to develop the recommendations specifically for internal implementation. The guidance on implementing with the help of a consulting firm is based on thorough discussions with representatives from Connor Group, a technical accounting firm with significant ASC 606 implementation experience.
Companies preparing to implement the new revenue standard must decide whether to implement internally or hire a consulting firm to help implement. Factors influencing this decision include the size of the company, internal resources available, experience of key personnel, complexity, budget limitations, and the length of time before the targeted implementation date.
How long will it take?
Depending on the size and complexity of the project, the implementation process can range from a few weeks to several months. Transition methods and timing will drive the project timeline. (Please see our article on Transition Dates and Methods for more information.) The initial organization of revenue and contract data also significantly impacts the length of this process. Because ASC 606 is a contract driven model, implementation is easiest when revenue can be traced to its corresponding contract(s) with little difficulty. It is not uncommon for companies to have tracked revenue by product line or customer historically. Consequently, reorganizing historical revenue data for ASC 606 can be a time-consuming process. Although implementation is not required for public companies before December 15, 2017, previous financial periods included on financial statements after this date must also be presented in accordance with the new standard. It is therefore recommended that companies begin as soon as possible as the implementation project will require significant effort.
How much will it cost?
The cost of internal implementation depends on current capacity. Carving out time to dedicate to ASC 606 from existing roles can be difficult. One Fortune 100 company interviewed for this article hired a full time project manager to lead implementation efforts. While this company is providing the project manager as well as the technical expertise, it has additionally hired an external staffing company to provide the necessary man-hours unavailable internally.
Most consulting firms charge on time- and material-based hourly rates. These rates are affected by the level of expertise required. Firms will provide estimates on what an implementation project will cost based on the level of involvement, expertise, and man-hours required.
How difficult is internal implementation?
Often large companies, including the two interviewed for this article, have significant internal accounting functions and are capable of implementing the new standard on their own. Both companies indicated, however, that implementing ASC 606 requires significant time and effort that should not be underestimated. Although both companies will experience minimal changes to how their revenue is reported, the process is still time consuming and labor intensive. Companies interested in internal implementation should make sure they have the bandwidth and time to implement on their own. Because normal accounting functions must still be maintained throughout this process, there need to be personnel specifically assigned to implementing ASC 606 for a successful transition. The difficulty of internal implementation will be driven by the type of business, complexity of the issues, size of the company and other factors.
If a third party consulting firm is used, how relevant is the proximity of the firm?
Much of the work that a third-party consulting firm will perform can be done remotely. While fly-out visits to the company will likely be necessary, the limited locations of third party consulting firms will not be an obstacle to an effective engagement.
What will the implementation process be like with the assistance of a third party consulting firm?
Phase I: Assessment
A professional consulting firm will generally approach implementation through two basic phases: assessment and implementation. It is possible for a firm to only be involved in one of the two phases. Regardless, it is important that company personnel be very involved in all aspects of the implementation to ensure a smooth transition once the consultants transition out. Project management is also extremely important during both phases. Regular meetings and implementation milestones should be in place to ensure timely progress.
During the assessment phase, the consulting firm outlines the project, gains an understanding of the business, determines the appropriate accounting for ASC 606, formulates an implementation plan, and presents the plan to management. Throughout the assessment phase, the consulting firm will seek to leverage any previous ASC 606 efforts of the company.
The initial steps of the assessment phase are the discovery period. During discovery, the consulting firm organizes the project team, defines roles for individuals involved, develops the communication protocol, learns the client’s business, and gains a deep understanding of the revenue model. At this point, the team will identify and develop familiarity with each of the company’s significant revenue streams to outline the scope of the project and define necessary steps ahead. The discovery phase is often most effective and efficient when the team meets with personnel from key departments that have a thorough understanding of the revenue model including accounting, finance, IT, marketing, legal, and sales. It is also important to gain an understanding of historical revenue accounting under ASC 605.
Following discovery, the consulting firm can develop a technical accounting policy outlining how the client should account for revenue under ASC 606. Each of the five steps in the new revenue recognition model will be analyzed according to the specifics of the client’s business and revenue model. These specifics include the company’s collectability practices, contract terms, pricing practices, and customer arrangements.
To develop the new revenue policy, the consulting firm will consider the company’s business objectives, operational feasibility, and technical requirements. While the consulting firm will seek to develop a policy that meets the client’s business and operational goals, it is important to take a position consistent with US GAAP that the auditor will support.
Though the consulting firm will be heavily involved in developing the new revenue policy, it is crucial that a client representative take ownership of the project to ensure successful revenue accounting in the future. Connor Group explained, “Developing a policy should be a joint effort between the firm and the client.” Ideally, the company will allocate a dedicated resource to lead the implementation project and work alongside the consulting firm.
After the new technical accounting policy has been determined and documented, the consulting firm can identify the operational impacts of the new policy and work together with the client on developing an implementation plan. The implementation plan may include template changes, process adjustments, system changes, and training plans. At the end of the assessment phase, slide decks, memos, or other deliverables documenting the policy and implementation plan will be produced and presented to management.
The assessment phase can last from a few weeks to six months, depending on the size and complexity of the company and its revenue model.
Phase II: Implementation
In order to implement the new revenue policy, Connor Group recommends identifying material differences between ASC 605 and 606. Once drivers of material differences are identified, only contracts containing those driving elements need to be reviewed. Narrowing the scope of contracts requiring restatement through this approach will make implementation more manageable.
Differences in revenue recognition need to be captured and recorded carefully. Though Microsoft Excel can be a valuable tool in capturing this information, it is often more effective when systems (e.g. RevPro, Oracle, NetSuite or SAP) can be automated to perform necessary tasks. If the system involved is particularly complex, an IT expert will need to be involved. IT experts should have the regular assistance of technical accounting experts as they test the system automation to ensure it is properly identifying and recording the affected revenue transactions in accordance with GAAP. When an automated system is utilized, reliable controls must be in place including data validation controls and manual reviews of contracts exceeding a designated amount. These controls should be well documented.
How do companies implementing internally describe the process?
The process for internal implementation is very similar to the process involving a third party consulting firm. However less research is required at the onset of the project, as internal personnel begin with a better understanding of the company’s business and revenue model. One Fortune 100 company choosing to implement internally recommends starting by refining the existing revenue streams and identifying drivers of possible change for each revenue stream. This stage often requires the company to prove that ASC 606 has no impact on certain revenue streams. After contracts are analyzed and organized into groups with similar characteristics, internal systems must be programmed to identify drivers and consequently flag contracts affected by ASC 606. Lastly, this Fortune 100 company recommends that specific contracts be manually reviewed to check that the system accurately identifies drivers within contracts affected by the new revenue policy. If previous steps are completed carefully, analyzing specific contracts should confirm what has already been resolved.
A different Fortune 100 company recommends approaching internal implementation through distinct revenue topics. In addition to utilizing a project manager and a steering committee, this company has assigned one individual to head a work stream focused on each relevant revenue topic. This individual is responsible for leading research efforts and identifying impacts of ASC 606 on that specific topic.
What is the auditor’s role during the implementation process?
Throughout the implementation process, companies need to have frequent and thorough conversations with their auditor. Developing a technical policy for ASC 606 without involving the auditor means risking the need to rework technical conclusions and wasting implementation efforts performed incorrectly. A company’s accounting firm can be one of its best resources to ensure correct understanding of new revenue standards. One Fortune 100 company recommends that companies implementing internally first utilize available resources to take a position on their own and then substantiate the position with the auditor. A manager of technical accounting at a different Fortune 100 company cautions: “companies need to be careful not to use auditors as consultants.” Resources to help companies understand the new standards include subscriptions to research libraries, Big 4 guides, and white papers.
Consulting firms strongly recommend that auditors be involved before any technical policy is finalized. If a consulting firm is hired, weekly meetings with the auditor and the client may be appropriate. All stakeholders should agree on the technical policy.
What difficulties do companies experience during the implementation process?
Companies who choose to hire a consulting firm occasionally rely too heavily on the third party assistance. If this occurs, the client will have difficulty continuing to report revenue according to ASC 606 because key personnel within the company do not thoroughly understand the new process.
Companies often experience difficulty organizing their revenue on an individual contract level. Consulting experts who have dealt with disorganized data can help with this situation.
According to one Fortune 100 company who chose to implement internally, it is a challenge to find a balance between being satisfied with the easiest acceptable revenue solution and working harder to find the revenue solution best aligned with business objectives. Companies must also deal with industry variation that still exists despite the standard-setter’s efforts to remove it. One Fortune 100 company indicated that it was crucial to reach a consensus with other companies in the same industry regarding the correct accounting treatment of certain situations. Conferring with other companies helps to avoid different treatment of the same or similar transactions.
Lastly, the burden of implementing ASC 606 is magnified by the fact that revenue standard changes represent only one of twelve new accounting standards. Deciding how to couple ASC 606 changes with other accounting standard changes (leases, equity based investments, credit losses, etc.) leads to additional complexity.
What will the deliverables be following an engagement with a consulting firm?
While the ultimate deliverables are the restated financial statements according to ASC 606 standards, the consulting firm may help produce additional work papers, resources, and systems to ensure the client is prepared to continue revenue recognition according to the new policy. The deliverables may also include a tailored adoption memo outlining the developed accounting policy and a feasible implementation plan. In addition, the consulting firm will likely help produce slide decks for training and documentation, models quantifying differences between current rules and ASC 606, disclosures for the transition period, process flow charts, and updated templates and systems to ensure correct revenue recognition in the future. In some situations, deliverables will include white papers written with the help of the consulting firm on behalf of the client.
What specific advice do consulting firms have for companies implementing 606?
When preparing to hire a consulting firm, it is helpful for companies to get a sense of the quality of their revenue data. It is also crucial to have qualified individuals inside the company that can work alongside the consulting firm, drive the project internally, and take ownership. Lastly, in order to have a successful engagement, companies must prepare to have the internal bandwidth to make the implementation project a priority.
What benefits are there to ASC 606?
One Fortune 100 company recommends viewing ASC 606 as more than a compliance exercise and utilizing it as an opportunity to improve the efficiency and accuracy of internal accounting systems. Implementing ASC 606 provides a valuable reason to evaluate the revenue system and identify task redundancy within accounting departments.
Connor Group suggested that ASC 606 can also provide companies an opportunity to take a fresh look at their technical accounting for revenue and to take strong, well-documented positions that will hold up under audit scrutiny. It can also be an opportunity to provide better visibility and a clearer story to investors through revenue disclosures.