Losing Sleep Over FASB and IFRS 15?

Road to FASB?

January 1, 2018 will be here before you know it. Where do you stand on your IFRS 15 compliance? IFRS 15, the joint compliance initiative from the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) first announced in 2014, will soon be upon all public companies and their revenue recognition processes. IFRS 15 was created to clarify principles and create a common standard for recognizing revenue, and it has forced large B2B businesses to critically reevaluate and address enterprise-wide revenue management processes.

If they haven’t yet, affected organizations will need to develop and apply a five-step model to determine when to recognize revenue, and at what amount. KPMG provides a great overview guide for businesses navigating the change and looking for best options to ensure compliance with the five necessary steps, which are:

  • Identify the contract
  • Identify performance obligations
  • Determine the transaction price
  • Allocate the transaction price
  • Recognize revenue

The new guidelines may require a significant investment in business process change and enabling technologies to facilitate. The impact from the adoption of IFRS 15 is far greater in scope and depth than just a change to accounting and reporting processes and will affect core systems and processes in finance, compensation, billing, reporting, reconciliation, audit and disclosure among others. For companies to execute on this transition requires a clear understanding of contractually defined economic customer relationships.

And while the impact could apply to any large public company, specific industries sure to experience significant impact, include aerospace, asset management, building and construction, healthcare, transportation and logisitics, real estate, media, software and telecommunications.

Practical Challenges, Strategic Ramifications

Interestingly, most of the companies that I’ve worked with on this topic are as concerned with the practical execution of these changes as they are the strategic ramifications on their business. For most companies, things break down at the very first step. Many companies have tens or even hundreds of thousands of contracts.  Just finding all of their documents and getting them in one place is a huge challenge.

How do I know I’m not missing anything? Which contracts should I focus on first?  How can I document our interpretation? How can I do this across tens of thousands of documents without doubling (or tripling) my audit fees? These are some of the questions we hear as execution of this change starts becoming a reality in 2017.

Because this has been coming up regularly, we’ve partnered with our customers to optimize the digitization process for a handful of key rev rec “trip wires.” These are some of the tricky terms or clauses that have the potential to create challenges for the transition and need to have extra attention paid to them.  Some examples are:

  • Multiple element arrangements
  • Index-based pricing
  • Non-USD based pricing
  • Other embedded derivatives
  • Transfer of risk/INCOTERMS
  • Non-standard discounts

This makes it easy to find and group individual or “like” contracts and prioritize them for additional rev rec analysis. It also allows businesses to easily report across specific contract sets and compare that information to the mandated criteria set forth by IFRS 15.

Users can use this report of trip wires to prioritize work and then attach documentation of the rev rec treatment to the contract.  The best part is, this isn’t just a look-back process.  We actually implement this as a go-forward process for newly signed contracts, which enables an analysis of the contracts with trip wires that have been signed each quarter.

The Glass is Half Full—If You Want it to Be

As we’ve seen from Sarbanes Oxley, FCPA and so many other regulation steps before transitioning to new regulations can be a costly affair with questionable upside business impact.  That’s because most companies treat these changes as one-time all-hands-on-deck efforts.

What if, in the process of solving the FASB challenge, you were able to find an additional $10M in revenue?  The oppressive optimist in me sees this upcoming change as a potential catalyst to solve a previously intractable problem: companies don’t know what’s in their contracts and it’s costing them millions of dollars.

My hope is that smart companies and finance teams will treat this not as a one-time project, but as a way to finally get things in order. The challenge is there. The clock is ticking. The money has to be spent. The question is really around how fast can you go, how efficient can you be, and how much return can you get on your spend.

We've mapped the five essential steps to get you from here to IFRS 15 compliance along with more on how Pramata can help get you there faster. You can download this informative guide right now.

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