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Recognizing the Impact of the New Revenue Recognition Rules

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have issued their long-awaited converged standards on revenue recognition. The rules govern how and when revenue can be recognized in different industries. In essence, the new rule will do away with current industry-specific accounting practices and instead apply a single set of principles to all revenue transactions. Consequently, the new revenue recognition standards require changes on how organizations interact with suppliers, customer, regulators, and investors—and they will have a major impact on how functional areas interact within organizations.

In February 2015 APQC hosted a webinar, Revenue Recognition Transformation: Leading Change, Mastering Process & Driving Collaboration Enterprise-Wide, and, understandably, the webinar topic surfaced many questions about how organizations could understand the impact of the rules and make the necessary changes.

APQC and EY are examining what the change implies in terms of process excellence, cross-functional collaboration, and the finance organization’s role in driving a successful enterprise transition. We launched a four-part series on how organizations are preparing for the new revenue recognition rules, including interviews and advice from practitioners in finance and process and performance management that are already tackling the change. The purpose of the conversations is to identify best practices aligned with the four stages of change—(1) assessing the impact, (2) planning the needed changes, (3) implementing the plan, and (4) monitoring and continuous improvement.

In October, APQC and EY conducted the first series of discussions to find out how far along organizations are in addressing the new revenue recognition standards and what key steps they have taken to assess their impact on them.

What did We Find?

There are various ways organizations can tackle the changes created by the new revenue recognition standards. One approach involves overhauling everything, including opening up all the systems and processes. However, this method is very costly and time intensive, particularly for large organizations.

Instead, many organizations are starting small and use a more surgical approach to ensure efficiency. They are prioritizing the changes based on what is needed, rather than redoing everything; In other words, they are taking a stage-based approach to their assessments:

  1. Start by understanding what the changes mean in your industry— begin your assessment either by conducting your own research or working with external auditors and vendors to understand the standards’ implications in your industry. 

  2. Understand the accounting changes and revenue streams — understand the big changes in the technical accounting areas, define the areas where revenue touches operational and market components of the organization, and pinpoint which stakeholders need to be engaged going forward.

  3. Scope the impact on operational process and systems—engage stakeholders in operational functions like HR and IT to understand the impact on their processes and assess the scale of systems changes.  

  4. Look at the effects on the market components of the organization— market teams should only be engaged once all the operational aspects and impacts are clarified.

Not only does the staged-based approach use change management principles to target the right audience with the right message (and avoid confusion), but it also ensures that, with each phase, organizations can build on the learnings of the previous phase and prioritize the most important components as they move into the planning phase.  

For more information on how organizations are assessing the impact of the new revenue recognition rules, check out the full article and stay tuned for the second phase: planning the changes.

Want to participate in our next panel discussion—planning the needed changes? Contact me at hlykehogland@apqc.org.

For more process and performance management research and insights follow me on twitter at @hlykehogland or connect with me on LinkedIn.