Organizations that have already adopted the new revenue recognition standard (ASC 606) may have discovered that it was not a smooth transition. As with any type of change in the accounting standards/methods, there are deep rooted challenges to overcome; many layers of complexities must be sorted through to ensure your business complies with the Revenue Recognition Standards issued by the Financial Accounting Standards Board (FASB).
If you think all of this sounds daunting, complicated and like an ongoing challenge, you are not alone. Many have asked, “How can it be simplified?”
Allow us to shed some light on ASC 606 revenue recognition and the steps needed to become compliant. The FASB/ IASB standards have issued a five-step process for making revenue recognition decisions:
- Identify your contracts with customers
- Identify the performance obligations in each contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize revenue as the performance obligation is satisfied
These are critical steps that should be incorporated early into the accounting cycle and contract execution. However, they are often not addressed until the end of the close process. This can trigger a barrage of email activity. The tempo in the accounting and finance department accelerates as they seek vital information on project updates and a deliverables timeline. These last-minute requests place unnecessary strain on your employees. In addition, there are challenges that companies face as they work to meet ASC606 compliance.
1. Reliance on Spreadsheets:
Accountants will readily admit they have a tendency to rely on spreadsheets. It’s a skill they’ve developed over many years; they have become quite adept at plugging in numbers and adding formulas. While spreadsheets are practically regarded as a sacred accounting tool, they cannot be relied on to record revenue accurately every time. They are time-consuming, and leave a lot of room for inaccurate contract interpretations and human calculation errors, especially when managing large, complex spreadsheets. These inaccuracies increase as you attempt to copy, move or embed a worksheet into a spreadsheet.
In addition, serious challenges are likely to arise if an employee is suddenly out of office for a few days or resigns, leaving you in the dark.
2. Non-Automated Software Challenges
Accounting departments that utilize nonautomated software must manually maneuver through a complicated maze in order to recognize and defer revenue. In addition to being labor- and time-intensive, it increases the likelihood of contract misinterpretations, multiple data entry errors that occur when transposing or omitting numbers, duplicating information, or misplacing decimals, to name a few. These errors cause major distortions and discrepancies in a host of financial records.
3. Integrating Multiple Accounting Standards
A vast majority of companies today have some type of interaction with a global entity, which will require keen insight into foreign currency management.
Accounting departments that rely on non-automated software are now tasked with calculating the impact of foreign currencies on the general ledger; they are required to include both realized and unrealized gains and losses – per transaction – all in foreign currency.
Solution – Automation is the Way Forward
Fortunately, there is an easier way to maximize revenue management efficiency. With automation, you can support business growth while being operationally efficient and compliant.
Instead of being reactive, the accounting department can leverage automation to take a proactive stance with their revenue intelligence and management solutions.
Contract misinterpretations, repetitive tasks and tedious spreadsheets can be eliminated, along with the need to create a separate revenue recognition schedule for each contract. When you reclaim time, you can devote your attention to other value-added projects.
How Astute can Help you Meet your Performance Obligations
We will start by demystifying the ASC 606 language and translating it into layman’s terms. We have a comprehensive understanding of revenue recognition and will suggest ways to streamline the process so it removes your accounting department’s pain points, and thus, significantly slash their manual work.
- Automating ASC 606 Revenue Recognition - August 11, 2021
- A Company’s Secret Weapon—R&D Tax Creditfor Construction, Engineering, and Architecture Firms - June 30, 2021
- How SMBs Are Experiencing Growth by Outsourcing their CFO Services - June 2, 2021