ASC 606: When Even Google is Afraid
"Hopefully, fear is what you're feeling now."
Josh Paul, Head of Technical Accounting & SEC Reporting
Alphabet, parent company of Google
Maybe you heard about the Oracle fiasco. Oracle, a multinational computer technology company worth $40 billion, announced its quarterly earnings. The next day, they released revised figures. . . with half a billion dollars missing. How does something like that happen to a Fortune 100 company? And, if it can happen to Oracle, can it happen to you? Yes.
You might think the Oracle debacle was the result of bad accounting. But, it was actually the result of compliant, state-of-the-art accounting. ASC 606 is considered to be the most significant change in business accounting in 100 years!
Maybe you think it doesn't apply to you, because you're a small business. Ask your grandpa about Jeremy Gold and FAS 87. FAS 87 impacted 80% of the U.S. workforce and ignited today's $4.7 trillion 401K industry.
Oracle Lost $500 Million Overnight to ASC 606?!
If you haven't heard of ASC 606 or you plan to address compliance “some day,” you're in good company. Price Waterhouse Coopers reported that 75% of public companies, who were required to have compliant account practices by December 15, 2017, have yet to implement any changes in their accounting practices and 50% haven't even chosen a compliance strategy.
This gets a little wonky but failure to understand this could land you in jail. So, buckle up and keep reading!
As the global economy has become more interdependent, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) decided that businesses needed a standard way to recognize and report their revenue generated from customer contracts.
In 2014, these Boards jointly issued new standards, including ASC 606, which established rules that affect whether companies report gains or losses in future revenue projections. Specifically, companies have to recognize revenue in proportion to the goods and services they actually deliver to customers during the specified reporting period.
The rules are comprehensive, spanning your end-to-end processes from:
- Pricing, quotes, and orders;
- Revenue recognition.
Think about all the factors involved in the lifecycle of a sale: different subscription models, bundling, early contract termination fees, customer rebates, extended warranties, and shipping costs. The list is nearly endless.
Confused? Eric Knachel, the senior consultation partner for revenue recognition at Deloitte, described it this way, “It's as if your teacher isn't just demanding that you show your work, but also that you write an in-depth essay explaining the approach you chose, why you chose it, what assumptions you made, what tools you used, and what processes you followed to ensure nothing would go wrong.” Easy, right?
Public companies were given until December 2017 to comply with the new regulations. Private companies were given until December 2018. So, time's up for you and every other business. Even as a Fortune 100 company with four years to prepare, Oracle still lost the ASC 606 game. And, they're not alone. Uber reported their revenues might be cut in half due to ASC 606. General Motors predicts the impact of ASC 606 to be close to $1 billion. Do you know the impact of ASC 606 on your top-line revenue?
Failing to Be ASC 606 Compliant
Failing to be ASC 606 compliant comes with huge risks and consequences. In 2002, Xerox restated earnings and was forced to pay a $10 million fine for fraud. When MiMedx issued an earnings restatement in June 2018, four top executives were forced to resign. And, in November 2017, the CFO of American Realty Capital Partners was sentenced to 18 months in prison, required to complete three years of supervised release, and fined $100,000 after his conviction on six counts of fraud; he faced 20 years in prison and got off easy. You don't want to be next. Do you?
ASC 606 and Subscription Businesses
So, how will ASC 606 affect your subscription business? You can no longer calculate simple revenue recognition. You have to take into account evergreen subscriptions, upfront fees, discounts over time, equipment costs, account suspensions, and nonrefundable deposits. Other considerations:
- How do you account for usage, if that's part of your subscription model?
- How do you decide which dollars are contracted revenue or recognized revenue?
- When can you claim dollars as unbilled deferred revenue?
If your customers are like most subscription customers, they change their contracts four times over the lifetime of the contract. This includes upgrades, add-ons, bundling, downgrades, and other changes. Every change is essentially a new contract with a new valuation for ASC 606 purposes. How do you identify your contracts for compliance?
If you manage and report these myriad factors inaccurately, you may end up issuing earnings restatements which, at best, can be costly and damage your reputation. If your mistakes are too egregious, you may end up in litigation or find yourself possibly on the wrong end of criminal charges.
If you read our earlier blog post on subscription business models, you know that subscription models are the future of business. But, many companies are so afraid of falling out of ASC 606 compliance that they are actually delaying the launch of innovative contract designs, pricing models, and business strategies. There are processes and systems out there to manage new risk. You don't have to delay your business growth.
This may seem like a lot of work. However, because subscription businesses depend on customer lifetime value, you should already be taking a long-term view of things. The benefit of ASC 606 is that it will create more transparency and efficiencies in your financial tracking and forecasting.
With ASC 606, Inaction Is Not an Option
And, you're not alone. BluSynergy is here for you! Our qualified sales team can help you rethink your accounting practices to include the factors and processes you need to track for ASC 606 compliance. We can help you understand how future decisions about and strategies for your subscription models will impact your top-line revenue recognition. We can help your key leaders, including your CFO, assess whether our technology solutions are the right ones for you to automate your subscription business, stay in compliance with the new ASC 606 standards, and proactively manage the challenges of a constantly evolving global marketplace. At BluSynergy, your success is our success.
Confused about the impact of ASC 606 on your subscription business? Ready to take action? Give one of our BluSynergy sales consultants a call today at 731-INVOICE (731-468-6423).
BluSynergy offers technology solutions to automate your subscription business, stay in compliance with ASC 606 standards, and proactively manage global marketplace challenges.
Schedule a meeting to discuss top-line revenue recognition subscription model strategies.
And, don't forget to read our upcoming blog, “Managing Your Subscription Business for ASC 606 Compliance,” posting on April 26, 2019