Are you doing everything you can to prepare?
Important changes to the financial reporting guidelines will be taking effect in the coming years.
As of Jan. 1, 2018, all private companies (Jan. 1, 2017 for public companies) will face a new revenue recognition standard put forth by the FASB and IASB, in efforts to remove inconsistencies between the two boards and to force companies to more efficiently report revenue.
Additionally, other new financial reporting guidelines surrounding sustainability accounting and accounting for goodwill will go into effect in the next few years, as well.
The looming deadlines are having a fundamental influence on financial reporting, and the effects of these upcoming implementations, especially the revenue recognition standard, are going to impact all industries.
A recent CFO.com webinar broached the various financial reporting changes and discussed what CFOs and CIOs can do in advance to be best prepared. The webinar noted that the revenue recognition standard is the most significant change to come in the last five years.
Ernst & Young outlines the five-step revenue recognition model discussed in the webinar:
Step 1: Identify the Contract
Step 2: Identify the separate performance obligations
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to separate performance obligations
Step 5: Recognize revenue as performance obligations are satisfied
This blog will focus on the aspects of the proposed revenue recognition, specifically, and what CFOs and CIOs can do ahead of time to prepare for the changes.
Find the root cause.
Know exactly what drivers are behind the financials. A company should not have 100 key performance indicators (KPIs). It’s hard to see the correlation to revenue and know what truly impacts the financial results with too many KPI. Therefore, it’s best to narrow down these metrics and keep just five to 10 KPI. If a CFO has a better grasp on the cost per unit, or summary level data, he or she will be better equipped to explain gaps in performance. Overall, having more operational metrics will better prepare the CFO, the CIO and the organization as a whole.
Automate the workflow.
It’s best to have fewer manual entries in financial statement preparation and instead use more nimble tools such as sophisticated automated technology. This will improve efficiency in closing activities. Automated technology will also provide improved accuracy of the financials and better internal controls as a result. Big data has become just that, big, and the less human hands touching the data, ironically, the better.
Master data management.
The CFO has to work closely with the IT function, specifically the CIO, to govern the data so that as information changes over time, the shift in reporting requirements is properly managed with clarity. If changes in data cause different definitions on what should be reported, there needs to be an expert to monitor this and prevent any degradation.
Streamline financial processes with technology.
A measured approach should be taken to streamline processes, technology and systems, overall. CFOs need to create teams and systems now to better recognize revenue and all that is associated with the close process. It’s best to work directly with the IT function and any necessary third parties to get systems where they need to be for proper revenue recognition. Updating financial reporting practices with the latest technologies takes the human element out of the equation and paves the way for Enterprise IT.
Be proactive.
CFOs and CIOs have many ways to stay ahead of the game and develop a successful transition model in preparation of the five-step revenue recognition proposed model. Ensuring practices stay up with the times is key. So, setting a course for the team and making sure the finance function is ahead of the trends is not only important, but essential. There are free resources available to educate teams on these advancements and developments including various publications, associations and peer groups.
CFOs and CIOs should also focus internally, knowing exactly where the company is headed from a strategic perspective, such as being a part of the five-to-10-year-out planning committee.
CFOs should also get involved with the sales team, and other internal departments, to ensure that all contracts and revenue-driving forms are drafted in support of the new policy – so that they’re presented to customers accordingly.
The financial reporting changes are going to affect every company – globally. So, the quicker all U.S. companies start to prepare – the smoother and better the transition will be when they go into effect.
How is your company preparing for the upcoming financial reporting changes? Comment below and let us know!