One of the biggest things on most finance practitioners’ minds is upcoming revenue recognition changes. These are some of the most significant financial regulatory changes in the last 20 years, and the pressure is on to be prepared.
I’m responsible for managing the transition to these new standards—also known as ASC 606/IFRS 15—at Workday. While complex and daunting, it’s important that as practitioners we dive in and embrace these changes as they are here to stay. When talking with our customers and prospects about revenue recognition, I often share what I’ve learned so far in preparing, and the impact that our finance system—Workday—is having on the experience.
Like other companies, we’re currently in the process of digging into the guidelines and assessing the impact. Part of this includes reviewing contracts in order to determine which ones will be affected and the implications to revenue. As we go through this evaluation, we will determine the best strategy for transitioning to the new standards, and whether to use the full or modified retrospective method.
Also, while the new standards are specifically focused on revenue recognition, there will be broader implications across the business related to financial planning, expenses, sales operations, commissions, and more. So, part of our review also includes meeting with different stakeholders to discuss potential impacts.
All of this requires a lot of time and resources, but I’m excited about the ways in which our finance system is going to support our efforts. I have spent much of my career using legacy finance systems that required significant time and money to update for compliance during times of major regulatory change, including a lot of leg work during the assessment phase.
Now, as both a user and an employee of Workday, I’m realizing the power of a cloud-based system in adapting to regulatory changes. Workday Financial Management is one system of record with contract and transaction data in one place, making it easy to identify, assess, and report on contracts versus having to extract data from multiple or bolt-on systems for assessment.
Workday also enables side-by-side comparisons for how revenue is recognized now and under the new guidance. This isn’t easy to do in legacy systems —whether they are on-premise or cloud-based solutions—because the details of contracts are often captured outside of the finance system of record, such as non-standard terms that are unique to a particular contract, making comparisons difficult.
With just over a year to go until these new guidelines take effect for public companies, my biggest piece of advice for fellow practitioners is don’t procrastinate.
One change coming with these new standards is the ability to record a contract and recognize revenue at the time when the good or service is transferred to the customer, independent of when a company actually bills. For organizations on legacy systems, this creates complications because most companies’ revenue and deferred revenue posting rules are driven off the invoices they create. In Workday, we have independent schedules for billing and revenue that have allowed us to more easily identify which contracts will change or impact revenue, and appropriately schedule revenue under the new standard.
Another key consideration in preparing for these new standards is auditing, especially given the potential of these changes to affect a company’s financial statements. Because this change impacts both historical and future periods and transactions, finance organizations need to work closely with auditing firms to evaluate their approach and ensure they are in lockstep through the entire transition process, so there are no surprises upon calculating the impact, closing the books, and issuing financial statements.
Workday simplifies the auditing process for our finance team and our auditors. Our finance system has built-in workflows, called the business process framework, which enable us to see how a contract moves through the organization for approvals, making it easy to verify every step, change, and approval during this conversion to the new standard. For example, when we identify a contract that would be accounted for differently under the new standard, the system will allow us to set up an alternate contract to go through various levels of review, before summarizing or deciding to post any adjustments.
Documenting this transition process is much more difficult with legacy architected systems, with most of it happening manually outside of the system of record. If companies work outside of their systems in spreadsheets to capture data and gather approvals, there is great risk for human error, and auditing could become a nightmare. I expect this will double or triple the amount of auditing required for companies, however having everything better documented in one system should create an easier auditing process for everyone.
With just over a year to go until these new guidelines take effect for public companies, my biggest piece of advice for fellow practitioners is don’t procrastinate—the sooner you prepare, the readier you’ll be. Also consider these changes as an opportunity to reevaluate your finance system and think about how technology can support you through both this change and future ones. 2017 promises to be a busy year for all of us as we work to figure out these changes and get our companies ready, and I look forward to sharing more about my experience in the months ahead.
For more on the new standards, check out our Work Talk episode on revenue recognition or webinar “A Practical Approach to Adopting the New Revenue Recognition Standards,” featuring guests TechVentive, customer JDA Software, and Workday discussing the requirements and how technology can support them.