If you have a subscription-based business, you’ll want to listen up. There are a couple of new accounting practices in town — and no, we don’t mean the new bean-counter firms down the street. If you haven’t heard of them yet, then you need to be in the know. They are… ASC 606 and IFRS 15.
Wait — they don’t sound too ominous, right?
These two are about to wreak havoc on the current accounting methods of your business. Essentially, they will change the way your business recognizes revenue throughout your fiscal year.
Defined more specifically (but in layman’s terms):
- ASC 606 is getting rid of the current US GAAP transaction and industry-specific revenue recognition standards and replacing them with a principle-based approach. Meaning your revenue must now be recognized when control of your company’s contracted goods or services are transferred to your customer AND at an amount that is proportionate to what has been delivered by that point in time.
- IFRS 15 is important for any contract-based business that operates on a global basis. It aims to standardize the way in which multinational companies recognize revenue by enforcing the following five-step model for its contracts with customers:
- Identify the contract with a customer
- Identify all the individual performance obligations within the contract
- Determine the transaction price
- Allocate the price to the performance obligations
- Recognize revenue as the performance obligations are fulfilled
There’s a lot more to it than that, but the main thing to know is that these new accounting regulations have the potential to change the valuation of your company. That’s HUGE.
Here’s what you have to do, to prepare ASAP:
- Understand your exposure – See how the new standards will impact existing and new contracts. Learn how to reallocate revenues when customers renew, upgrade or add-on to their subscriptions.
- Compare your revenues – Look at your revenue recognition as it stands now, and compare it to how revenue recognition would be handled under the new standards.
- Adjust – No matter if you have a private, public or nonprofit organization, you’ll need to determine how the changes will impact your business processes. Learn how to adjust each one accordingly to comply.
- Automate – Look for ways to reduce your compliance risk through automating complex accounting processes.
A solution is available…but hurry
The effective date for public companies to be compliant is December 15, 2017, and for private companies, December 15, 2018. Keep in mind that it takes around 18 months for the average company to adopt the new standards. However, a highly respectable accounting software program can simplify the work required for implementing ASC 606 and IFRS 15. In our opinion, Intacct is the best for getting your business compliant. It also automates all the new, complicated accounting processes (like Contract Revenue Management and Contract and Subscription Billing for you.
Is your accounting software ready and able to tackle the brutal ASC 606 and IFRS 15 standards? If you’re not sure, then call us. It’s our business to know! And we want to share our knowledge and offer solutions to help your business get prepared ASAP. Act fast — as time is already running out. Contact us today!