By Steve Dalton, Senior Director, ERP Product Marketing, Oracle
At the turn of the millennium, IT professionals around the world were in a mad scramble to fix what was known as the Y2K bug (an acronym for “year two thousand”). Some of our readers might have been too young to remember this moment in history, so let me recap.
In a nutshell, most software written in the 20th century used a two-digit format to indicate the year—so the year “1999” was written simply as “99”. The problem with this truncated date was that, with the year 2000 about to dawn, computers everywhere were programmed to read the date as “January 1, 1900”—igniting fears that the world’s computerized systems would be plunged into chaos.
Fortunately, IT teams were able to fix the design oversight and avoid the collapse of civilization. But if you’re too young to remember Y2K, don’t worry. There’s still time to panic over revenue recognition.
Finance teams use the concept of “deferred revenue” to account for sales contracts that are on the books as accounts receivable today but won’t be fulfilled until future periods. All that is about to change.
Starting January 1, 2018, you’ll need to record “performance obligation” liabilities instead of deferred revenue. This the new approach is mandated by the ASC 606 / IFRS 15 accounting standard. The new guidelines will affect all public companies—so if you’re planning that IPO for your fast-growing business, you need to start thinking about compliance now.
Even some private companies will be affected. By 2019, the guidelines will govern organizations that are accountable to the public in some way—for example, government entities, credit unions, or companies that issue bonds and securities.
The biggest impact will be felt by companies in high technology, media and entertainment, telecommunications, retail and consumer packaged goods—in short, any company that works with complex contracts, that bundles goods and services together, or that typically has remaining deliverables even after the first major shipments are complete.
One example to consider this holiday season: suppose your sister buys you a gift card for five spin classes at your favorite gym. The revenue from these services (the fitness classes) cannot be recognized until either party acts—which in this case is taking the classes.
Does the gym recognize one-fifth of the revenue each time you take one of the five classes? When does the service company managing the gym’s gift card program recognize its share of the sale? And what about the points your sister earned when she used her credit card to buy the gift card?
All of these questions must be answered under the new standard, and the gym’s accounting systems configured to recognize and report accordingly.
In some sectors, the rush to comply with new RevRec guidelines is approaching Y2K-levels of frantic. Companies are busy implementing new accounting sub-systems, configuring accounting rules and setting up ledgers. Many need to capture and process data they have never captured before.
Reporting requirements will change, too—and not just for future financial statements. Investors and stakeholders expect accurate, year-over-year comparisons of financial performance from one period to the next. To provide these, finance teams will have to dive into previous years’ financial data and re-run old numbers against the new guidelines.
All of this is a tall order for SMBs working with small accounting teams. But there is help out there.
Third-party accounting firms have already begun the revenue recognition process with hundreds of clients; they can provide consulting expertise to help you sort out the requirements, as well as project staff to help reconfigure your accounting systems.
And if you’ve been running on small business accounting software, now might be a good time to consider an upgrade. Thanks to the cloud, ERP and EPM systems from providers like Oracle are now within budget for SMBs. There is even a revenue management cloud built specifically to help companies comply with the new guidelines.
Not all SMBs need to rush to compliance with the new guidelines; in fact, most don’t. But if you’ve already taken your SMB public, or are planning to in the near future, revenue recognition is an issue that you should sort out well before the panic sets in.