By: Linda Rosencrance
Although the deadline to comply with the new ASC 606 (Revenue from Contracts with Customers) is fast approaching for public companies of all sizes – private companies have another year – many are still rushing to ensure that their accounting processes and systems are updated in time.
“I’ve been on dozens of webinars and I’ve done a few myself and I think the vast majority of companies are underestimating the criticalness of 606,” says Neil MacDonald, Solutions Consultant at Binary Stream Software, a Microsoft Dynamics Gold ISV Partner.
MacDonald says he did a presentation of ASC 606 at a recent meeting of the Dynamics GP User Group and of the 35 people attending, only three even knew what ASC 606 was. He also recorded a session delivered to the MSDW Dynamics AX and GP audience earlier in 2017.
“At every webinar I attend, [it seems like] the number of people who know what it is, who are ready for it, are shockingly low,” he says.
Why firms aren’t ready
Companies aren’t ready for ASC 606 because they seem to be unaware of when the new guidance goes into effect, or they think it doesn’t apply to them, according to MacDonald.
“Unless you’re in leasing, banking, and insurance, 606 applies to you if you have contracts with customers,” he says. “The big changes are if something has to be deferred versus recognized upfront, companies have to make sure they’re recognizing and/or deferring the correct amount.”
ASC 606 is aimed at standardizing the way companies recognize revenue by aligning revenue bookings with the sales of products and services to help investors compare and contrast financial filings between companies; thus the standards ensure consistency across industries, geographies, and capital markets. The US-based Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued the ASC 606 guidance in 2014. The deadline for public companies is Jan. 1, 2018 and Jan. 1, 2019 for private companies.
According to the FASB, the main principle of the new standard is to “recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”
That means software vendors – Dynamics VARs included – must appropriately report revenue and expenses that correspond with the period of the contracts.
The five-step process involved in ASC 606 is:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) each performance obligation is satisfied
By these new standards, companies would immediately report revenue from a one-time sale of software installed at a customer site; but they would recognize revenue from a contract for access to software evenly over the contract period, regardless of how the payments are structured.
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An attempt to mitigate risk in reporting
“What the new regulations seek to do is prevent the recognition of too much revenue upfront,” says Jeffrey Russell, managing director of enterprise consulting at Armanino LLP. “They’re trying to mitigate the risk that companies over-report revenue.”
Russell says that there is an inherent business process risk in terms of how companies adapt to these new standards. They will have to transition in an evolving fashion , dealing with contracts that are in place today as they’re trying to run their businesses.
“So how do they manage that? I say [companies should] speak to the idea that the whole revenue recognition isn’t just a system discussion,” he says. “Some people think that various tools – for example, we have a revenue recognition solution that’s built on Dynamics AX to help manage that – will do all that for them. Yes, it helps with the mechanics of recognizing your revenue, but it can’t dictate your business process for you.”
Deborah Jefferson, senior industry specialist, at Tribridge, also a Dynamics partner, says that although she can’t see any effect on business processes, such as taking orders, shipping inventory, etc., some of the contracts may need to be rewritten.
“So you may want to restructure contracts to incorporate items that you previously had not incorporated or to delete some things that you had include previously,” she says.
Companies that are using percentage of completion, such as big airplane manufacturing companies, will have to recognize the revenue as they complete the work, Jefferson says.
“They won’t be able to wait until they turn over control to the end user,” she says. “They have to find ways to track costs, i.e., inputs and outputs, to be able to recognize a portion of that revenue as they go along rather than waiting until the end.”
Dynamics ERP solutions: Any help out of the box?
In addition to having a system in place to properly report revenue to start FY 2018, ASC 606 also requires companies to retroactively restate their revenues from the past three years to allow for proper auditing compliance.
“This isn’t just an accounting function,” MacDonald says. “It’s also a systems function. There is no way inside Dynamics ERPs to do those revenue calculations automatically.”
That’s why ISVs like Binary Stream exist, he says.
“So if companies are running Dynamics GP, NAV, AX, 365, they’re going to have to take all of their revenue outside the ERP, do 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,” MacDonald says. “We have a product that will do that for you and we’re not the only ones.” A quick search of Microsoft AppSource for ASC606 apps discovered both Subscription Billing for Dynamics 365 from Binary Software, and Revenue Recognition ACM by Tribridge.
Russell says that Dynamics GP is generally unsophisticated around managing revenue, thus, few ISV solutions exist that aid compliance with ASC 606. “Most of those companies are using spreadsheets or in some cases maybe they’re using other…financial management solutions that are either best-of-breed or point solutions to help with this,” he says.
The story is a little brighter in the upper midmarket enterprise space where Dynamics AX (Dynamics 365 for Finance and Operations) fits, according to Russell.
“In that case, you have a couple things,” he says. “I think the most underutilized area of the AX solution is the project accounting module. It gives you the ability to manage a lot of the revenue, the contracts, the obligations and the revenue associated with it for a multitude of scenarios. It won’t work for everything, but it can work for a majority of what the business needs.”
Still, “When you look at ISV solutions, there is more sophistication in the AX ecosystem … that clients could leverage,” he says.
Microsoft has been quiet on the subject of ASC 606, although it adopted the standard as of July 1, 2017, and (as ASC 606 requires), applied the standard retroactively to the last three years of earnings. But a search of its product documentation, partner documentation, and product roadmaps, reveal no plans.
This seems to frustrate MacDonald, who asks, “Have they even read the standard? There are calculations that GP can’t do and we’re now releasing our products for AX, NAV and D365 because they can’t do it, either – and companies are slowly finding out.” By all appearances, Microsoft is treating ASC 606 compliance as it does, for example, EDI or project management. It will provide a broad and solid foundation, while leaving it to ISV partners to develop deeper functionality – or, as its parlance goes, “to take advantage of the opportunity.”
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