Tague_Strategic Finance Article

PREPARING FOR ASC 606

How to use CHANGE MANAGEMENTto your advantage

By DOUG ARMS AND TONY BERCIK

November 2015 / STRATEGIC FINANCE / 35

36 / STRATEGIC FINANCE / November 2015

here’s no rest for the weary.That old saying is probably as true formanagement accountants and otherfinance professionals as it is for folks indifferent walks of life. It might resonateeven deeper these days as you get ready toroll up your sleeves and face another newset of regulations.

As you know, on May 28, 2014, the InternationalAccounting Standards Board (IASB) and the FinancialAccounting Standards Board (FASB) together issued a con-verged standard about recognition of revenue from con-tracts with customers. Known as ASC 606, Revenue fromContracts with Customers, the standard will improve thefinancial reporting of revenue and improve comparability ofthe top line in financial statements globally, the Boards say.Under the new revenue reporting regulations, which wouldestablish a common revenue standard for U.S. GenerallyAccepted Accounting Principles (GAAP) and InternationalFinancial Reporting Standards (IFRS), an entity will have toimplement the following five steps:

1. Identify the contract(s) with a customer.2. Identify the performance obligations in the contract.3. Determine the transaction price.4. Allocate the transaction price to the performanceobligations in the contract.

5. Recognize revenue when (or as) the entity satisfies aperformance obligation.

These changes will affect every organization, though towhat exact extent will differ on a company-by-company basis.

Despite the fact that accounting and finance profession-als are aware of ASC 606 and its implications in terms oforganizational change, what’s surprising from our point ofview is how blasé some organizations, particularly those inthe private sector, have been about this matter.

Granted, with the Sarbanes-Oxley Act of 2002 (SOX)and the Dodd-Frank Wall Street Reform and ConsumerProtection Act of 2010, there have been a lot of regulatorychanges in the past 10 to 15 years, so a certain amount oforganizational fatigue is to be expected. Nevertheless,timely, accurate revenue reporting is critical to compliantoperations. That means that even with the recentlyannounced deferral of ASC 606 implementation to Decem-ber 2017 for public entities and 2018 for nonpublic organi-zations, it’s crucial to start preparing for the upcomingchanges. And that involves not only assessing each contractand revenue stream but ensuring that the right talent is inthe right place to implement the necessary adjustmentswhile still maintaining the company’s day-to-day opera-tions. Consequently, organizations that aren’t yet preparingfor the transition are putting themselves at a disadvantagein terms of acquiring the talent necessary for the change.

Déjà Vu?If your organization is a vendor, ASC 606 will likely impactyou in a number of areas—both inside and outside theaccounting department—including contracts with cus-tomers (plus those with product warranties and returns),bonus plans, expenses, taxes, IT, internal controls, andinvestor relations. If your company is a customer, you maysee changes in how vendors propose contracts or sell prod-ucts or services to you.

Especially for vendors, multiple departments will beaffected, including Accounting and Finance, Internal Audit,Human Resources, Sales and Marketing, Legal, IT, andOperations. Policies and processes will need to be updated,data management will need to be adapted, reporting meth-ods and control will need to be modified, and employeeswill need to be educated about the changes and how toadhere to the new regulations.

Clearly, all of this will involve change at the organiza-tional level. Yet while the changes are spelled out and thesteps are established, companies will still need to use theirbest judgment in implementing the principles-basedapproach for determining revenue recognition for their ownunique structures. At the same time, it’s important to realizethat this required change also presents the perfect opportu-nity to streamline and optimize methods.

Sound familiar? It should, since we’ve been in this typeof situation before.

In 2002, when organizations were required to adapt inter-nal controls to comply with SOX, many companies struggledto implement the necessary changes on time. In fact, accord-ing to Paulette Chu in her May 18, 2005, JournalStar.com article, “Delayed corporate filings show effects of Sarbanes-Oxley,” hundreds of organizations didn’t file their annualreports on time for the 2004 deadline. Moreover, an esti-

T

Even with therecentlyannounced deferral of ASC606, it’s crucial to start preparingfor upcomingchanges.


mated 77 companies, each with revenue of morethan $100 million, missed the 2005 deadline for fil-ing quarterly reports, citing ongoing work on theirinternal controls as well as financial restatements.

How did this happen?To a large extent, it was because of a low supply

of skilled talent combined with misconceptionsabout how that talent wanted to work. At the time,it became clear that many employers simplyassumed the right people would be available—despite widespread warnings to the contrary.Moreover, the general notion was that companiescould bring in external consultants to manage thechange. There was also a distinct preference fortalent with Big 4 experience since the brandrecognition stands for quality, safety, and mini-mized risk.

A Shortage in the Private Sector Unfortunately, though there were many profes-sionals in the Big 4 and other public accountingfirms with the necessary expertise pertaining tointernal controls, the availability of professionalsfor the private sector was severely limited— especially because demand suddenly spiked.

To complicate matters, many of those whowere available were looking for permanent posi-tions. As a result, a huge market developed forpermanent finance and accounting talent withinternal controls experience. Additionally, thedemand for auxiliary talent to fill lower-levelpositions increased.

With numerous organizations competing fortalent, many were late to start implementing thenecessary changes. The ripple effect continuedthrough companies that not only had to imple-ment the changes but also update roles andresponsibilities as well as educate the existingworkforce about the changes—an area that compa-nies didn’t factor in sufficiently for such a far-reaching regulatory requirement.

The intense scrambling within companies toimplement SOX produced a number of clear les-sons that may repeat themselves with ASC 606:n Organizations need to start preparing for changein a timely manner.

n Talent might not be available in all locations orlabor categories and may have expectations thatdon’t match organizational needs.

n High demand for talent is likely to drive upcosts.

n Increasingly, more quality professionals aren’trepresented by the Big 4’s banners and insteadform their own brands as independent contrac-tors and freelancers.

n Provisions need to be made to educate those partsof the workforce that are affected by the change.

The FASB introduced the revenue standardinto its Accounting Standards Codification®(ASC) as Accounting Standards Update 2014-09,Revenue from Contracts with Customers (Topic606). Topic 606 replaces the previous guidanceon revenue recognition in Topic 605, RevenueRecognition. Public entities, certain not-for-profitentities, and certain employee benefit plansshould apply the guidance to annual reportingperiods beginning after December 15, 2017. Allother entities should apply the guidance toannual reporting periods beginning after December 15, 2018. For more information, visitwww.fasb.org.

The IASB introduced the revenue standard inInternational Financial Reporting Standards(IFRS) as IFRS 15, Revenue from Contracts withCustomers. It replaces International AccountingStandard (IAS) 18, Revenue; IAS 11, ConstructionContracts; and related Interpretations. An entityshould apply the guidance to annual reportingperiods beginning on or after January 1, 2018.For more information, visit www.ifrs.org.

ABOUT ASC 606


As an example, at our own company, Kelly Services, weinitiated a three-year change management project to makethe adjustment to comply with SOX. Project managementconsisted of a combination of experienced Kelly talent andselect experienced outside vendors, both of whom coordi-nated the tactical work. Additionally, we brought in talentto perform support roles under the guidance of projectmanagement, allowing the core strategic team to focus onthe process management changes. Thanks to this clearfocus on change management and timely preparation, wewere able to adapt our internal controls and adjust ourprocesses in an appropriate and compliant manner.

Lots of Moving PartsAs we’ve seen, ASC 606 will affect organizations in a num-ber of critical areas—ranging from accounting to contracts tomarketing—across a variety of departments, includingAccounting, Legal, IT, and Operations. In order to effectivelymake the necessary adaptations, organizations will have to initiate change management swiftly and accurately, thenconsistently adjust processes and procedures across the various departments.

Effective change management begins with establishingan “Impact Analysis” team that can in part consist of con-tracted accounting, operations, legal, IT, and HR talent. Insome cases, depending on the complexity of the organiza-

tion, it may make sense to include internal talent whoknow the organization through and through. If that’s theroute your company chooses, you may need to hire addi-tional people to cover their duties while they’re performingthe impact analysis.

The impact analysis team should work to gain anoverview of the current state of your organization—and thedesired future state—to determine how strategy will beimpacted. Items to consider include:n The state of your systems and controls. Will they beable to support the changes to process and reporting?

n Talent mix.What types of talent will you need to work onthe implementation? Do you have them on staff, or doyou need to supplement with additional talent?

n Daily operations.Who will handle the work of thosecore team members who are reassigned to work onimplementation?Assuming the organization has an integrated strategy

that optimizes each department’s functions to supportoverall business objectives, it’s logical that revenue report-ing changes will have tactical consequences. This meansthat roles and responsibilities are likely to change. Perform-ing an in-depth impact analysis will clarify where and howthese changes need to take place in terms of policies,processes, data, and reporting.

Next, the impact analysis team must secure supportfrom internal stakeholders who can help drive the neces-

ASC 606 won’t affect allindustries equally. Accordingto recent reports, those thatare expected to suffer themost impact are those thathave longer or extendeddelivery cycles or complexand nonstandard contractterms, such as those in thefollowing fields.

SOFTWARESoftware contracts haveevolved to contain specificrenewal and rate-setting practices. As a result of ASC606, software companies will have the opportunity torevisit their contract terms and conditions.

REAL ESTATEBecause of the nature of realestate transactions, revenue isoften recognized at a laterstage, which will continue to be the case under the new regulations.

ASSET MANAGEMENTContracts typically contain percentage-based fees forservices and performance,resulting in variable revenueover time. Companies will have to estimate revenue andupdate it in their quarterlyreports.

FEELINGTHE IMPACT


sary actions throughout the organization—as well as letpeople know what sort of negative things could happen ifthere are delays. In any event, it’s crucial to understandthat, regardless of whether the impact analysis identifies amaterial change or a responsibility to ensure the companyis aware of its exposure, the assessment itself, as well asadopting the five steps identified earlier, most likely will bematerial. Therefore, it’s advisable to get out in front of thechange instead of acting too slowly and risking complianceissues and penalties.

Measuring the Degreeof ChangeDetermining how to effect the changes identified by theimpact analysis team will be different for each organization,depending on the availability of talent and the budget. Here’swhat should be taken into account:n Is there talent in-house to set up a Project ManagementOffice (PMO) to manage the change, or does external tal-ent need to be brought in?

n If appropriate, is there access to talent with global knowledge?

n If in-house talent will spearhead the change manage-ment, will external talent need to be brought in to “back-fill” positions?

n If external talent needs to be brought in, will this be inthe form of consultants and independent contractors,temporary full-time hires for the duration of the transi-tion, or, because there’s a lack of supply in permanentroles, direct hires?

n If external talent will be utilized, will the complexity ofthe organization impact their ability and time required todetermine the gaps and subsequent impact?

nWill external support personnel need to be hired to assistthe core team with the transition?

nWhat is the availability of talent in terms of proximityand labor category?

nWhat is the budget for the acquisition of talent?nWill the workforce be trained in the new processes andprocedures by external consultants or by an in-houseteam?Some of the problems companies might encounter are

similar to those they grappled with when adopting SOX.Accounting talent is becoming scarce because of stringenteducation requirements and the Big 4’s highly aggressiverecruitment practices. As a result, accounting talent withthe expertise to oversee this type of change is in very highdemand. Many professionals with the right skills are seniortalent who are currently transitioning from employmentwith the Big 4 to retirement but who aren’t yet ready toleave the industry completely. It’s highly likely that theywill form the backbone of the change management teams

TELECOMSThe telecommunications industry typically sells servicesand products—for example,bundled products such as ahandset combined with a textmessaging and data plan. The new regulations require the revenue for each good or service to be reported accordingly.

CONSTRUCTIONConstruction companies usually have long-term con-tracts that may be paid overtime and/or include a bonus fortimely completion of a project.In some cases, they provideintegrated services, such asdesigning, engineering, andfinal construction completion,as a part of a contract. In allthese instances, it will be nec-essary to calculate or judge therevenue flow for the completeddeliverables with or without thebonus, as well as the deliverydate of the individual productsor services.

ENTERTAINMENTIf customers are purchasing alicense with rights to accessintellectual property, revenuemust be reported over timeconsistent with the fulfillmentof the performance obligations.

Even organizations that aren’tpart of these industries anddon’t handle complex or varying contracts still have to meet the ASC 606 revenuereporting requirements. And though their changeprocesses are likely to beless invasive, these organiza-tions still need to start working toward the transitionsooner rather than later inorder to locate and recruitthe talent they’ll need.


on a part-time, consulting basis. But will this be enough tohandle the growing demand?

Of course, organizations will need other types of talentas well. Legal talent will be in high demand to assess andadapt contracts, operations talent will be needed to imple-ment changes, and IT talent will have to modify systemsand data.

As a result of the high demand, companies need toremain open to sourcing talent from a variety of categoriesand to consider a full continuum of workforce models.

Time to Partner?Transitioning to ASC 606 is likely to be a labor-intensive,drawn-out, and costly process for many organizations. Tocomplicate matters, day-to-day operations need to continuewithout interruption in order for a company to remaincompetitive. Consequently, with many operations beingvery lean today, there’s a risk of shortchanging either one,or both, of these focus areas.

This is where collaborating with a workforce solutionspartner that has extensive experience in change manage-ment can be helpful. A workforce solutions partner canassist with everything from contract or consulting talent tosupply chain management, recruitment process outsourc-ing, or complete change management. It can advise yourcompany regarding the talent strategy that makes the mostsense for the organization, utilizing existing resourceswhere possible and looking for the most cost-effective waysto bring in additional talent. Moreover, when it comes tohiring external talent to handle sensitive financial and IPdata, a workforce solutions company can help mitigate riskbecause of its access to previously vetted, proven, trustwor-thy talent.

What It Will CostThe costs associated with change management will varyper organization. Clearly, companies with a wide range ofproducts, services, or nonstandard contracts will have toassess and adjust each one at every level. Moreover,organization-wide changes will have to be made—frompolicies and processes to data recording and staff training.The budget for these costs will depend on the overallamount of change needed, as indicated by the impactanalysis.

How organizations implement change will also influencecosts. For example, companies that have in-house talentcapable of managing the change won’t have to budget forexternal consultants. Yet private contractors may be worththe investment if they’re more experienced and betterequipped to optimize certain key processes.

Similarly, organizations that bring in talent to “backfill”positions could be driving up costs if they offer this talentfull-time, direct-hire positions without taking into accountthat they’ll be scaling back this sector of their workforceonce the transition is complete. Instead, contingent talent—temporary at first, with the option to bring them on full-time if necessary—would be a more appropriate solution.

When it comes to keeping costs down, timing is also a

key factor. Wait too long to attract talent in a highly com-petitive market, and you might find these people in a muchstronger position to negotiate higher pay, better benefits,and more perks.

Partnering with a workforce solutions company can helpkeep a lid on costs, particularly when it comes to streamlin-ing the talent supply chain and ensuring that the right peo-ple are in the right places. With in-depth knowledge ofwhere the talent is, what they want, and how to attractthem, it’s more feasible to control costs. At the same time,when it comes to change management, an experiencedworkforce solutions company can help establish a leanproject management team and ensure cost-effective changeprocesses.

It’s vitally important for companies to be compliant withall regulations and reporting requirements. By assessingwhich processes must be changed, how the changes need tobe implemented, and what workforce strategy will be mosteffective (and cost effective), forward-thinking companiescan prepare their organizations properly so that the actualimplementation of ASC 606 changes is as smooth and suc-cessful as possible. SF

Doug Arms is vice president of Americas Finance Center of Excellence atKelly Services, Inc., a leading provider of finance and accounting staffingand workforce solutions. He’s responsible for strategic planning, brandmanagement, thought leadership, and growth strategies aimed specificallyat the finance and accounting specialty in North America for both job can-didates and hiring managers. He’s also an IMA Member-at-Large. You canreach Doug at (248) 229-7285 or [email protected].

Tony Bercik is product director for Americas Finance Center of Excel-lence at Kelly Services, Inc. In this role, he’s responsible for the strategicdevelopment and growth of finance and accounting workforce solutions inthe U.S., Puerto Rico, Canada, Mexico, and Brazil. You can reach Tony at(248) 463-8361 or [email protected].

Forward-thinkingcompanies can prepare their organizations properly for ASC 606implementation.

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