Today Workday announced the adoption of the new revenue recognition standard, ASC 606, on the first day we were permitted under the new rules and a full year before our required implementation in 2018. We believe we are the first software company to adopt the standard and among only a handful of public companies to adopt a year early.
If you’re like me, you’ve been following the new rules that were approved almost three years ago. You are probably evaluating the impact on your company, finding resources and dollars in your budget to do the work, and in many cases questioning your legacy software systems as you scope the requirements of the new accounting standards. As you may know, the work involved in evaluating these rules, selecting a strategy, and executing that strategy is no small undertaking.
We knew we could adopt early and felt it was important to share that experience with two core audiences.
That’s why we share a great sense of accomplishment in having adopted the new rules a full year before the deadline. As Workday’s CFO, I want to address a few key points on why we adopted early and how were able to accomplish the change so quickly.
Why was it important to Workday to be an early adopter?
Simply stated, we knew we could adopt early and felt it was important to share that experience with two core audiences.
First and foremost was the value that we thought we could bring to Workday customers. We know that when we can be the first to use newly released Workday products and features, we can share that experience and knowledge with our entire customer base. As one of the first users of the revenue recognition functionality in Workday Financial Management, we can now share our insights and help our customers as they work through their ASC 606 adoption process.
Over the last year, we also observed growing curiosity in the investor community around how this standard will impact public companies. Given our focus on investor transparency, we felt it was important to provide the earliest possible visibility into how the new standard impacts Workday. By adopting the full retrospective approach, we will start our fiscal year on the new standard and not be reporting under both methods as required under the alternative approach (modified retrospective approach) permitted under ASC 606.
How are Workday’s financial statements impacted by the new standards?
At a high level, the impact on the income statement is twofold:
First, the new standard impacts the timing and classification of revenue for many of our customer contracts. In applying the standard retroactively, we had revenue changes in all periods and actually had some revenue “disappear” into our beginning retained earnings balance. In general, the standard simplified our subscription revenue recognition and added complexity to our professional services revenue recognition.
Second, the new rules require that we defer more contract acquisition costs and amortize those costs over a longer period of time.
There is also some movement in the balance sheet with increased assets for deferred costs, changes in deferred revenue, and the introduction of unbilled receivables. Importantly, and consistent with our belief in value of looking at cash flows, the standard has no impact on our cash flows statement.
How was Workday able to accomplish this milestone?
When Dave Duffield and Aneel Bhusri co-founded Workday, they focused on delivering true cloud applications—like Workday Financial Management—that equip customers to more easily keep pace with complex changes driven from within their businesses and the outside environment, including regulatory changes such as ASC 606.
Had we been using a legacy financial system, it would not have been possible for us to be an early adopter.
Workday Financial Management includes revenue recognition functionality that allows all customers to evaluate, model, and then apply these new standards, as well as account under the new standard going forward. This functionality is embedded in the core system of record and delivered to customers through Workday’s regular update process. Had we been using a legacy financial system, it would not have been possible for us to be an early adopter, and our adoption would have cost us considerably more money.
There was, however, a significant component to the adoption that wasn’t technology related, including detailed review and interpretations of the standard as well applying that interpretation through detailed reviews of customer contracts. So in addition to our technology, great credit goes to the Workday accounting team for enabling us to reach this milestone.
What were some lessons learned along the way?
While each company will have its own unique challenges, we uncovered some interesting insights along the way. First, regardless of the ultimate dollar value impact on your financial statements, we learned that the process of interpreting and applying ASC 606 is critical to moving forward with adoption and will allow you to more efficiently conduct the detailed customer contract reviews. Another area to consider is bringing independent auditors into the fold early on since they’ll need to be involved every step of the way—they’re your partners throughout this process and will make the whole experience smoother.
I would urge finance practitioners to not underestimate the effort this will take. The earlier you can start this process, the better. I wish you all great success in your ASC 606 projects, and look forward to hearing from other Workday customers as they join us in meeting this important requirement.