certinia IFRS 15 Revenue Recognition User Guide
- June 12, 2024
- certinia
Table of Contents
certinia IFRS 15 Revenue Recognition
The CFO Guide to Revenue Recognition
The CFO Guide to Revenue Recognition is a comprehensive guide that provides valuable information and solutions for companies seeking compliance with ASC 606 or IFRS 15 standards. This guide addresses the challenges faced by both public and privately held companies and offers insights on how to navigate the transition process successfully.
Tom Linsmeier, a member of the US Financial Accounting Standards Board (FASB), emphasizes the significance of complying with these standards, as they greatly impact financial statements.
Product Usage Instructions
Assessing Impact
Evaluate your primary revenue streams to identify revenue recognition
requirements.
Evaluating Effort
Understand the scope of work required and assemble the right plan, team, and
budget. Consider factors such as contract evaluation requirements,
comprehensive disclosures, and post-transition revenue recognition plans.
Achieving Compliance
Implement the necessary measures to achieve compliance with ASC 606 or IFRS 15
standards.
Throughout the guide, it is highlighted how the right cloud application can assist in reducing friction and ensuring a smooth transition. It is also mentioned that underestimating the effort required for compliance can lead to negative outcomes.
The guide concludes by emphasizing the opportunity for strategic wins across businesses when navigating the challenges of revenue recognition compliance.
Both public and privately held companies should now be ASC 606 or IFRS 15 compliant. Are you?
In this guide, we’ll review the three major challenges for companies seeking
compliance with the new standards — and reveal the opportunity in the
challenge.
We’ll illustrate how the right cloud application can reduce friction and
position your company for a smooth, successful changeover. We’ll also explore
one common mistake that can spell disaster no matter where you are in the
transition process, and the criteria for evaluating technology solutions.
This is a major accomplishment that will greatly changehow people think about perhaps the most important item in financial statements.
Tom Linsmeier
Member of the US Financial
Accounting Standards Board (FASB)
Complying to ASC 606 and IFRS 15 TACKLING THE 3 BIGG EST CHALLENG ES
Assessing Impact
Evaluate your primary revenue streams to identify revenue recognition
requirements
If you aren’t armed with the proper information, making the best business
decision can be difficult. At some point in the transition process—ideally
early on—you’ll need to assess how the new standards will affect your company.
This includes an evaluation of primary revenue streams and key contracts to
identify the revenue recognition changes required and the business units where
these changes may have the greatest impact.
The questions that come up during this phase are weighty. When you apply the
new five-step compliance model (as defined in the standards’ documentation) to
a sampling of mission-critical contracts, what happens to your revenue
recognition profile? Will you need to change the design of your customer
contracts? Can your sales process stay the same, or does it need tweaking? If
you aren’t armed with the proper information, making the best business
decision becomes difficult.
How the right cloud application can help
A technology solution can’t make outright business decisions— a job best left
to skilled humans—but it does provide you with the tools and flexibility to
examine what’s really going on in your business, and how it will change under
the new standards.
The right cloud application empowers your teams to make more informed business
decisions without relying on time-consuming, error-prone spreadsheet analysis.
It puts useful, actionable information—both granular and high-level—at your
fingertips.
Evaluating Effort
Know the scope of work required so you can assemble the right plan, team, and
budget
Several factors will impact your resource allocation and cost calculations:
-
Contract evaluation requirements
You’ll need to develop a new rules-based framework for your accounting policies based on an assessment of your contracts. If your contracts are highly variable, will it be burdensome for the transition team to thoroughly evaluate each one and draft new policies accordingly? -
Choice of transition method
The full retrospective and modified retrospective methods each have pros and cons, but both require significant implementation efforts. The full retrospective method requires restatement of the prior two comparative years (possibly three), while the modified retrospective method requires dual recordkeeping during the adoption year. Do you have the necessary systems and people in place? -
Handling comprehensive disclosures
The new standards’ requirements for quantitative and qualitative disclosures are significantly more expansive than those under the previous guidelines. How will you create a method for systematically gathering, reviewing, and disclosing information about remaining performance obligations, including resources consumed, labor hours expended, costs incurred, or machine hours used? -
Post-transition revenue recognition plans
The full retrospective and modified retrospective methods each have pros and cons, but both require significant implementation efforts. The full retrospective method requires restatement of the prior two comparative years (possibly three), while the modified retrospective method requires dual recordkeeping during the adoption year. Do you have the necessary systems and people in place?
How the right cloud application can help
A robust technology solution offers two key ways of reducing the amount of
required manual effort: automation and flexibility. First and foremost, the
right solution helps you track various revenue streams, automate allocations
and calculations, and configure different rules and templates for different
calculations — all while eliminating your reliance on overly complex
spreadsheets.
Additionally, a strong technology solution also eases the pain of implementing
a transition method. Your choice of method should be driven by what’s best for
investors, auditors, and financial statement readers, not by the capabilities
of your IT systems (or lack thereof). With a strong technology solution, you
can recognize revenue under the previous standards up to your transition date,
then seamlessly deploy retrospective or parallel recognition processes. Let
your systems empower you to make the best choice for your stakeholders.
Achieving compliance
Deliver the right reports to internal and external stakeholders
You’ll need to deliver the right reports internally and externally, to pass an
audit—the crux of this entire endeavor. But if your revenue recognition
process is based on spreadsheets, an audit will be painful. Inefficient and
error-prone, spreadsheets are notoriously difficult to audit. Furthermore,
multiple user access easily leads to versioncontrol problems, degrading data
quality. It’s not just anecdotal: the European Spreadsheet Risks Interest
Group cites research stating that 50% of spreadsheet models used operationally
in large businesses have material defects.
How the right cloud application can help
A strong technology tool reduces errors and bolsters your data integrity.
Best-in-class solutions seamlessly integrate with your other business apps and
link directly to source data, eliminating manual keying and messy data
synchronization efforts.
With the right system in place, you can produce clear audit trails and attach
supporting documents and evidence directly to transactions. A robust tool also
provides user-friendly reporting options, allowing you to slice, dice, and
customize your data on a summary level or on an item-by-item basis. With
better reports, your business teams will make better decisions.
Don’t come up short: Avoid the underestimation trap
Even business leaders who realize they must make changes can still fall victim
to a common error: underestimation. Preparing for the new standards demands
considerable time, effort, and resources at all stages. For most
organizations, implementing the new standards is a complex project that
demands significant planning and coordination.
If you determine your company will only be minimally impacted by the
transition—perhaps you have a straightforward business model with standardized
contract structures—underestimation can still be dangerous. Don’t
underestimate the amount of effort required to update accounting policies,
systems, and internal controls.
What should you look for in a cloud revenue recognition application?
Powerful, flexible data models
Revenue models continue to multiply, from product-based to SaaS to bundled and
usage-based contracts. The right tool recognizes revenue from multiple
sources, including directly from opportunities, orders, contracts, projects,
and invoices. The data model should also handle complex use cases, including
multi-element arrangements.
Seamless integration with other applications
The best cloud applications harness the power of your existing platforms (e.g.
Salesforce) and integrate directly with your other applications, including
customer relationship management (CRM) and professional services automation
(PSA).
Configurable templates and rules
The right tool enables you to adapt to whatever comes next. Create different
rules based on your needs and how you want to recognize revenue. Find a tool
that adapts to what’s best for your business—not the other way around.
Forecasting capabilities
Go beyond retrospective reporting to gain a complete picture of your business.
A cloud application should empower you to derive revenue forecasting with both
recognized and forecasted values on multiple revenue source data.
The opportunity in the challenge
If you’re committed to leaving spreadsheets behind or curious about upgrading
your current technology solution, now is the perfect time to make that
decision. The right cloud application can help solve some of the major pain
points associated with transitioning to the new revenue recognition standards
and making your next audit less painful.
Meeting the compliance standards takes time and careful planning but it
shouldn’t be a dreaded process. In fact, organizations large and small will
find the transition provides an opportunity to transform their businesses for
the better. Far beyond simply helping them pass an audit, choosing a cloud
application to help with revenue recognition
will allow organizations to more easily evolve to meet customer demands in the
new services economy.
With companies of all shapes and sizes exploring new and diverse business
models, you have the chance to start running your own business in entirely new
ways. Once you’ve established baseline needs by automating processes and
building audit trails, you’ll be able to do even more—centralize all your
revenue streams in one system, automate revenue calculations, reduce period-
end close, deliver a complete picture of your organization’s revenue, and
more.
Don’t get bogged down by compliance standards. Transform the process into an opportunity for strategic wins across your business.
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