Wel­come to Year One of ASC 606

Ex­pect un­cer­tainty as com­pa­nies wres­tle with rev rec

Accounting Today - - Assurance - By Ja­gan Reddy

In Septem­ber, a very strange thing hap­pened — Or­a­cle an­nounced its quar­terly earn­ings, then re-an­nounced them a day later, with a half a bil­lion dol­lars miss­ing from the top line. Wall Street had a col­lec­tive spit take. The end re­sult was a lot of con­fused an­a­lysts and a hit to Or­a­cle’s earn­ings es­ti­mates.

The man­age­ment team in the Emer­ald City clearly dropped the ball here. But you can ex­pect to read a lot more sto­ries like this over the next 12 months. Why? Be­cause 2018 is Year One of ASC 606.

In 2014 the Fi­nan­cial Ac­count­ing Stan­dards Board and the In­ter­na­tional Ac­count­ing Stan­dards Board is­sued new stan­dards — ASC 606 and IFRS 15, re­spec­tively — with new rules for rec­og­niz­ing rev­enue across all in­dus­tries around the globe. The goal was to sim­plify and har­mo­nize rev­enue recog­ni­tion prac­tices glob­ally, which is re­sult­ing in fu­ture rev­enue gain or loss when ac­counted for un­der the new guide­lines.

FASB gave ev­ery­one around four years to adopt and com­ply with the new rev­enue rules. And now … time’s up! Start­ing this year, pub­lic com­pa­nies and start­ing next year pri­vate com­pa­nies of all sizes must adopt the new guide­lines, which re­quire rec­og­niz­ing an amount of rev­enue pro­por­tion­ate with the goods and ser­vices ac­tu­ally trans­ferred to cus­tomers dur­ing the re­port­ing pe­riod.

Clearly, not ev­ery­one is ready to make the leap. Or­a­cle’s re-an­nounced earn­ings re­port was ASC 606-com­pli­ant, but the com­pany ap­par­ently failed to dis­close or re­lease 606 re­sults on the day quar­terly earn­ings were re­leased. The re-an­nounce­ment on the sec­ond day left an­a­lysts on Wall Street con­fused. Wall Street was ex­pect­ing to see bulls, but was met with bears.

The new ac­count­ing rules are con­sid­ered by many to be the big­gest change to ac­count­ing stan­dards in the last 100 years. Non­com­pli­ance is a huge risk. Rev­enue recog­ni­tion er­rors are the big­gest rea­son for earn­ings re­state­ments. Earn­ings re­state­ments can lead to fir­ings, fines and even jail time.

What’s more, these new rules are par­tic­u­larly tricky for any com­pany with re­cur­ring rev­enue. Com­pa­nies with us­age-based, “X-as-a-ser­vice” sub­scrip­tions, or bun­dled rev­enue mod­els like Box or Zen­desk, must deal with deep com- plex­ity when ac­count­ing for rev­enue. To make mat­ters more com­pli­cated, ev­ery mod­ern busi­ness faces con­stant on­go­ing con­tract changes, which im­pact the way their rev­enue needs to be rec­og­nized and re­ported. If you don’t have some kind of au­to­mated so­lu­tion to this prob­lem, you’re go­ing to be left with lots of con­flict­ing cal­cu­la­tions and bro­ken spread­sheets. Poor re­port­ing and in­ac­cu­rate fore­cast­ing re­sults in per­plexed an­a­lysts (full dis­clo­sure — my com­pany Zuora pro­vides rev­enue recog­ni­tion soft­ware).

This is why Ver­i­zon has been work­ing on this is­sue for years. Work­day hired a ded­i­cated team of ac­coun­tants to pore through thou­sands of con­tracts. Uber’s re­ported rev­enues might get cut in half. GM ex­pects the im­pact to be up­ward of $1 bil­lion.

So why did Or­a­cle mess this up so badly? Es­pe­cially con­sid­er­ing that it ac­tu­ally sells rev­enue recog­ni­tion soft­ware that’s in­tended to ad­dress this very prob­lem? We’ll never know. But I don’t think this is just a case of poor cor­po­rate mes­sag­ing. It’s be­com­ing in­creas­ingly ob­vi­ous that legacy ERP so­lu­tions like Or­a­cle and SAP just aren’t made for these times.

ERP com­pa­nies were built back in the 1980s to help com­pa­nies man­age sup­ply chains and in­ven­tory. In other words, they were built to help com­pa­nies sell wid­gets. That’s just not how things work any­more.

The real growth is hap­pen­ing in cloud ser­vices and sub­scrip­tion mod­els: Ama­zon, Box, Net­flix, Do­cusign, Spo­tify, Sur­vey­mon­key, etc. Or­a­cle and SAP have tried to buy their way into this new “sub­scrip­tion econ­omy” with ac­qui­si­tions, but as this lat­est ASC 606 de­ba­cle shows, the leop­ard can’t change its spots.

That might also ex­plain why Or­a­cle hasn’t been break­ing out its pure cloud rev­enue lately. “Gen­er­ally speak­ing, when a com­pany chooses to re­duce the amount of fi­nan­cial de­tail it shares on its key strate­gic ini­tia­tives, that is not a good sign,” an­a­lyst John Dins­dale re­cently told Ron Miller of Techcrunch.

I couldn’t agree more.

AT

Ja­gan Reddy is se­nior vice pres­i­dent of Revpro at Zuora.

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