ASC 606: It's coming for you
If you are a professional services organisation (PSO) worried about the new rules for revenue recognition caused by ASC 606, you probably should be.
Back in 2014 when you first heard that revenue recognition standards were changing, you probably thought “Oh revenue recognition, finance can deal with that” or worse “December 2018, I’ll deal with it then.” Well guess what, ASC 606 isn’t just a finance problem, and the deadline part, it’s sooner than you think.
What is ASC 606?
The high level outcome of ASC 606 is that companies will recognize revenue when goods and/or services are transferred to the customer based on what has been delivered to that point. While this makes sense, it is really complex in practice. Contracts change all the time – new licenses added mid-term, additional hours added to an SLA – so that trying to nail down how much has been delivered up to a point is really burdensome for accounting teams as well as services teams. “Revenue from Contracts with Customers,” was issued by the Financial Accounting Standards Board (FASB) in conjunction with IFRS 15 from the International Accounting Standards Board (IASB), and went into effect to replace all industry-specific guidance. While public companies were required to adopt these changes for all annual reporting for periods that began on December 16, 2017 or later, private companies have an additional year. So yeah, time’s up for all of us starting this December.
Are you sure it’s not just a finance problem?
Nice try. ASC 606 impacts almost every facet of the organisation. Services teams are going to be especially impacted because time reporting is tied to revenue and difficult to capture and recognize as it is performed. Logging time is no longer a nice to have but a must have, and forecasting will not just be your service organisation’s lifeline, but your finance team’s too. And of course, it’s government mandated, so everyone needs to get on board.
Where Do I Begin?
The good news is that it’s not too late. ASC 606 requires all private companies to be compliant by December 31, 2018 but you’ll need to get started now. If you don’t already have a services automation tool, that is a great place to start. Luckily, most Professional Services Organisations are already tracking time against projects so identifying how much of that project has been completed at any given time is doable. But a PSA solution will allow you to automate that process and make compliance with the new standard easier moving forward as you have the data captured in a single location. Even better if you can integrate with your finance system (Intacct, Quickbooks, etc.) so the information is available to the finance team with up to date, accurate reports. PSOs that we work with here at KeyedIn are generally out on front of these changes, largely because they manage their projects in the KeyedIn Projects Solution and can run reports and analysis of their revenue before they’re required to meet this deadline.
Let’s look at MedHost as an example. This company is a recognized expert in healthcare technology and engagement solutions. Their project teams are out in hospital systems delivering contracted technology and consulting services for hundreds of medical professionals at a time—or for ten people at a medical practice. The business challenge of consolidating so many disparate solutions while balancing resource requirements is a story unto itself. However, the visibility and control that MedHost gained helped them line up the analytics they needed to feed right into their financial system (Intacct, in this case).
With revenue recognition processes built into their portfolio (percentage of completion and payment terms) and integration with the Intacct financial system, Medhost can easily run reports to meet the ASC 606 requirements.
In a recent blog by the Finance Executives International (FEI) team, they shared other ways to lock down ASC 606-compliant practices (in addition, of course, to ensuring you’re running your portfolio on KeyedIn Projects). Here are the highlights:
Aligned governance: The accounting and services departments are not the only departments to be impacted by ASC 606. The FEI folks want you to know that cross-department impact based on contracting governance should be managed as well. Referring back to the MedHost example, they were able to accomplish this easily because KeyedIn Projects aligns contracting for all functions impacted at MedHost so they’re not comparing apples to oranges when allocating resources and measuring demand. At the end of the day, KeyedIn’s link into their financials is consistently visible so the value of each contract can be monitored throughout its lifecycle—and beyond.
Integrated data: “Until such time as data, both historical and newly created can be pushed through the revenue system, there will be little to no visibility into the potential internal system gaps.” That’s exactly what was happening at MedHost before they implemented KeyedIn Projects. Today, that’s not an issue.
Auditors involved early: Once you can dashboard an integrated financial picture based on real portfolio information, your auditors will sleep better. And their ASC 606 audits will go smoother.
Disclosure reporting: Chances are, you’ll need a more “detailed level of disclosure reporting” which simply means you have to have metrics in place to measure the value of your current contracts at the time of initiation and throughout their life cycles. Only a portfolio managed centrally, with all of the moving parts within it available in real-time, will be able to deliver that. We can’t tell you which disclosure reports your company many need—that varies by industry—however, based on others who have been through it, FEI assures us that you’ll need more than what you’re used to providing. End-to-end portfolio management in a single system is the only way you’ll get it.
To hear more about how MedHost conquered ASC 606 using KeyedIn Projects, watch this short video.