A smooth accounting close is critical to producing financial statements efficiently and effectively. Public companies who have adopted ASC606 for revenue recognition have already felt the impact of the new data requirements on their close process. Here are three close areas that the new revenue standard will impact:
- Program expense classification - historically, the auditors focused on the G&A and R&D classification on the income statement. With an input method model for revenue recognition, improper program expense classification changes the revenue recognized in the period. If the expense is miscoded between a program under the collaboration agreement and one that is not, the percent complete (which drives the revenue recognized) is impacted. Control processes such as program budget-vs-actuals and invoice classification review during the weekly check run can reduce the risk of program misclassification.
- The FP&A function - program development changes and the associated financial impact will affect the total costs to fulfill the performance obligation and the percent complete in the current period. This shift will impact the current period revenue and the long-term and short-term classification of deferred revenue The FP&A function can provide critical support to get the auditors comfortable with the assumptions used to determine future costs to complete the performance obligation.
- Employee time reporting - employee effort is part of the cost of providing research and development services under a collaboration agreement. As such, this data will be needed to calculate the total expense incurred for each program. With a small workforce, an employee survey is sufficient. But as the organization grows, this will become cumbersome. Leveraging a time reporting system such as NetSuite or R&D Logic can make this process easier for the accounting and research team.
The accounting close process needs to be executed properly to ensure timely and accurate financial statements. Considering the impact of the new ASC606 revenue recognition standard on the close will help ensure a successful transition to the new standard. If you are struggling with the operational challenges of ASC606, check out our revenue recognition product page to see how intheBlk’s software solutions can help your company better execute on their revenue recognition reporting.