What you need to know about ASC 606/IFRS 15 & how to stay compliant.
For many in the accounting field, implementing the necessary process to stay compliant with the ASC 606/IFRS 15 accounting standards is going to be quite a challenge.
This new revenue accounting law went into effect on December 15, 2017, and all businesses are required to follow the guidelines by the next fiscal year.
What’s ASC 606/IFRS 15?
ASC 606/IFRS 15 changes the way businesses must recognize revenue.
Massey Consulting explains, “A major implication of the new process is that instead of recognizing revenue when cash is received, companies will recognize revenue when performance obligations – formerly referred to as deliverables – are met” (Massey). This means that accounting departments must completely overhaul their processes for reporting on financial results.
To stay compliant with the new law, companies face the complex challenge of extracting the necessary data – not only to accurately report future transactions but also to retroactively adopt the new guidance for past years and accurately restate results:
- Many companies have numerous disparate accounting systems, none of which are integrated for data sharing. When you need to pull data from the different sources into one centralized location for reporting and analysis, your accounting team has to spend many hours manually entering the information, which is an error-prone process.
- If you rely heavily on Microsoft Excel for reporting, you’d have to look up spreadsheets from the previous three years and recalculate reports to ensure that data is reconciled in compliance with the new law. This can be an arduous, painstaking, and error-prone process for your accounting team, when they could be focusing on less operational tasks and bringing additional insight to the business.
- You need to clearly define what revenue to attribute to which quarter based on the new guidelines. For instance, the old guidelines require companies to spread revenue over 12 months for subscription purchases. The new guidelines consider such revenue the same as perpetual purchases. This change can impact the processes in different departments – such as sales, finance, and legal – making it a challenge to clearly show the impact and get everyone on the same page.
- Being non-compliant with the new guidelines by the deadline or reporting any errors could result in material weaknesses for public companies and result in serious problems for shareholders.
How to Stay Compliant with ASC 606/IFRS 15
Here are some critical steps you need to take in order to meet the compliance requirements:
- Create comparison models to determine the effect of the new regulations on revenue recognition.
- Review the accounting and financial documents from the past three years to see how you need to recognize the revenue in accordance with the new guidelines going forward.
- Track all changes and recalculations made to financial documents for auditing purposes.
- Communicate to the rest of the organization the impact of the new guidelines on your numbers and how they affect your revenue expectations.
How to Streamline Your Reporting & Auditing
Getting your accounting and reporting process compliant with ASC 606 can take a lot of time if you have to pull three years’ worth of historical data from multiple sources, manually enter it into one centralized system, and check for accuracy.
In addition, if the data needs to be reviewed by auditors, they’d have to spend many billable hours just recreating the process to verify the information.
Thankfully, you can simplify and automate the data access, migration, and reconciliation processes with a self-service data preparation and analytics solution.
The technology allows you to extract disparate data from virtually any source, then clean, enrich, combine, and manipulate it for analysis and reporting.
Auditors will have visibility into the calculations, so they don’t have to spend endless hours (which will be billed to you) to validate the reconciliation process.
Since the data prep can be done without coding, manual data entry or involvement from IT, accountants can put together the required information with relative ease – spending less time on data preparation and more time on ensuring compliance.