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KEY LESSONS FROM SUCCESSFUL ASC 606 IMPLEMENTATIONS

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Revenue management is a complex exercise for most businesses. The incoming guidance change in the form of ASC 606 has made it even more complicated. The new standards are based on one overarching principle: Companies must recognize revenue when goods and services are transferred to the customer, in an amount proportionate to what has been delivered at that point. This a paradigm shift in accounting and companies are struggling to meet the new compliance deadline.

Zuora RevPro, our industry-leading revenue recognition automation solution, has helped more than a hundred companies of all sizes and industries with almost as many individual requirement scenarios work towards meeting the ASC 606 guidelines. During our partnership with these customers in implementing the solution and establishing processes, we’ve realized the most valuable commodity for ASC 606 adoption is experience. Since this is the first time for everybody – businesses, auditors, and regulators – many common (and often avoidable) mistakes tend to get repeated.

In order to help companies in the midst of the adoption process or those still figuring out a solution, we are sharing some of the most valuable lessons we’ve learned so far.

Here are the key lessons from our ASC 606 Implementations:

1) You think you have time, but you don’t

Time is not on your side, unfortunately. Those who thought they were getting an early start a couple years ago have found themselves to be just in time to meet the new guidance.

The ASC 606 guidance requires a different mindset for accounting. It’s critical to understand the impact to your organization, revenue streams, allocation determinations, and also cross-departmental impacts. Issues such as variable consideration and contract modifications, in particular, will require substantial understanding and decision-making. The complexities of the new standards require a dependable solution flexible enough to handle the requisite requirements, business processes and policies, and upstream system changes.

With such a large undertaking and critical ramifications in play, it’s important to consider what’s necessary to get you to the finish line on time, and successfully:

A strong project governance process cannot be over-emphasized.

Allow more time than you think you need for critical milestones such as selection of your systems integration (SI) partner or product selection.

Don’t be afraid of putting your potential SIs through the wringer during the selection process. Experience has shown us that although a project manager is utilized, it is the SI which will likely own and run the implementation project.

In terms of the project timeline, be prepared for one that’s in constant flux. You have to be open to change, whether that change comes in the form of timeline changes, team makeup or the number of steps involved.

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2) Aligned governance is critical

Adopting the new standards is not an IT project, it’s a business transformation project. Successful steering committees include executive sponsors, IT and business teams, SI and solution vendor representatives – all working together as one unified team. A steering committee aligned from the beginning allows for quick decisions and solutions when issues arise. In addition, it’s important to collaborate with the CFO and, where appropriate, investor relations groups on choosing the adoption method for the new guidance. This will help you gauge how the chosen method will be perceived in the public domain.

A proven framework for successful ASC 606 implementation involves the following milestones:

Using the new standardIdentifying the stakeholdersIdentifying the right business systemsUnderstanding the revenue management system

It is important to understand the system does not stop and start with your revenue management solution. A properly designed model includes upstream systems and processes. It is also essential to be flexible enough to change policies.

3) Understand your upstream data better

Upstream systems – those from which data flows into your ERP – are typically not out-of-the-box solutions, so take the time to carefully understand the data flow and isolate the most helpful samples. Nobody knows your data like you do and, therefore, it is up to you to help external parties understand it and also to apply this data to the selected solution.

There will be data conversion work, regardless of whether the method of adoption is full retrospective or modified retrospective. In fact, the most critical

point in the project is the first data conversion cycle. While a test run during User Acceptance Testing (UAT) using new transactions is beneficial, you will still be surprised the first time historical data is run through end-to-end. Until you start pushing all your data (historical and newly created) through your revenue system, you will have no visibility into the potential data gaps in your system. When you send data through your system, you’ll be able to see what bounces out, which integrations work, and what changes are necessary. Then, you need to make the changes and send the data through again, and again, until you eventually get clean results.

Keep in mind:

You cannot expect conversion of all historical data to go perfectly the first time. Be willing to see what’s wrong and prepared for multiple iterations to get it right. Make sure you’ve built in time to allow for unexpected changes.

Converting multiple years of data impacts a lot of people in a lot of departments. It’s not just processing the data, but the system implementation as well. It’s critical to have a good partnership among all the teams touched by this project.

Nobody knows their data well enough to be able to think through every scenario, the frequency of those scenarios or the results of interactions within the integration. Every company should expect to come up with more use cases than initially anticipated.

4) Get your auditors involved early

Getting a company’s auditors involved early and often is key to a successful implementation. From an auditing perspective, the implementation of ASC 606 is one of the biggest changes organizations must undergo. This change potentially impacts everything – policies, systems, processes, SOX, and

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audit controls.

Talk to your auditors during the data validation process. If you’re able to tie back validations to financials under ASC 605, figures with which the auditors should already be familiar, confidence will be established in relying on the delta between 605 and 606 financials. This can allow for testing to focus on what’s new, so validations can be tied to items already audited.

The reality is auditors themselves are struggling with how best to handle these new situations. They will need companies to meet them in the middle, whenever possible. Auditors will not know what that aforementioned delta is or how it was determined without your input.

5) Be prepared for more disclosure reporting

One of the biggest impacts of the new guidance is in the area of disclosure reporting. While some companies are leaning toward a more basic level of disclosure, others are pursuing more detailed disclosure reporting. Our recommendation is to build out a more detail-oriented system which can always be pared down, if necessary.

In the case of subscription businesses, these disclosures become particularly critical for investors. The real value-add of these accentuated disclosures is what it tells investors about a company’s performance. A simplified version may result in perceived unreliability leading to a preferred reliance on more traditional metrics, which in the subscription space could result in reliance on inadequate metrics such as deferred revenue or billing. While there isn’t one perfect metric, transaction price disclosure is the closest thing to a real view of how a business is performing.

Besides the added benefits of being able to plan and understand what investors want within your industry, there’s the element of perception. If a company does the bare minimum, investors will ask questions, especially if industry peers provide

more detail. Eventually, a standard will be set within each industry and it is better to not be at the bare minimum end of the spectrum.

6) The only thing predictable is unpredictability

Unpredictability is something which, obviously, is hard to anticipate, but when it comes to data conversion testing, we can assure you – be prepared for unpredictability. While traditional testing is done in a logical business order – an order is signed, invoice is issued, and a credit or change order is issued – that won’t be the case here. There’s no such thing as testing transaction by transaction because data is not being sent through the system in any logical order and will certainly result in complexities.

A point of unpredictability more specific for subscription companies to consider is contract modification. Subscribers have the freedom to upgrade, downgrade and make other changes triggering contract modifications.

Remember:

You’ll want to be able to test core functionality such as contract modification, earlier rather than later.

A handy rule of thumb for the design phase of your project is to have about 90 percent of your requirements down, along with associated use cases, with the remaining 10 percent closely monitored as system design gets underway.

Having a dedicated data team available to execute the use cases with clean upstream data will help avoid errors.

The implementation is not going to follow a linear process. Data migration, data repair, policy changes, and the implementation itself will all happen together, not one at a time.

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7) Other challenges

Recasting: Whether going with full retrospective or modified retrospective, a company will still be required to recast, the difference being the volume of transactions and length of the retrospective period between the two models. In the long run, the amount of work involved may equate to about the same between full retrospective and modified retrospective so there may be added value in doing a full retrospective for a company implementing an automated solution.

One theory that successful implementations debunk is to simply throw ‘more staffing resources’ at the recasting process. The success of that response really depends on the quality of the resources. A critical best practice is to get highly qualified and knowledgeable resources involved in the early stages of the project and to continue to work with them every step of the way.Above all else, err on the side of more when budgeting time to do the recast. We’ve found

that the time needed to complete this process is always underestimated. Several rounds of loading, fixing and validating is time-consuming and could require upstream process or integration changes.

Testing: A critical element to the success of these implementations has been the level of testing involved. Unlike traditional testing scenarios which are mostly IT-led, business resources must be involved in testing your ASC 606 implementation from day one. A lot of complex data is required to test use cases. Without the right people to create data quickly enough and in a format to mirror how the company actually processes orders, expect difficulty in successfully testing, retesting and tweaking scenarios as additional complexities are uncovered.

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Plan: Keep in mind this exercise is a true project, not an audit. Plan accordingly with the help of PM techniques, tools, and experienced resources. And, since strong project governance cannot be over-emphasized, don’t be afraid to put your potential SIs through the wringer during the selection process.

Team-building: The most successful steering committees will include executive sponsors, IT and business teams, SI and solution vendor representatives – all working together as one unified team. A steering committee aligned from the beginning allows for quick decisions and solutions when issues arise.

Methodology and Tools: Consider using a waterfall methodology, rather than iterative or scrum, and utilize proven templates to drive the project and define the thought process to an external auditor.

Communicate: Keep your external auditor informed, but do your best to drive the conversation with proven points to validate decisions. Don’t expect your auditor to make decisions for you.

Prepare to Pivot: While the assessment phase will involve mostly accounting and finance teams, the design and implementation phases should incorporate other departments, including IT, legal, sales, procurement and others. Trade-offs: Negotiation skills will be key when it comes to deciding what should be automated versus manual, given the levels of effort, costs, resources and time involved.

Testing Unpredictability: While traditional testing is done in a logical business order, that won’t be the case here. Data is not being sent through your chosen system in any logical order and will certainly result in complexities.

Due Data Diligence: Make sure all relevant data has been analyzed, corrected, and converted before integration with your revenue management system.

IMPLEMENTATION TIPS

Each implementation of this new, principles-based guidance will undoubtedly be specific to individual company needs and requirements. However, a clear understanding and application of the lessons outlined above can help to increase the success rate of this generational shift to your company’s finances.

Zuora RevPro is the world’s leading revenue automation solution. RevPro enables you to streamline revenue recognition as your business grows to meet current and future revenue standards, including the new ASC 606 and IFRS 15 standards.

For more information, visit: www.zuora.com/products/revpro