Transitioning to the New Revenue

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SAP, IFRS Revenue Recognition

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Transitioning to
the new revenue
recognition standard

An integrated approach to leveraging
your SAP investment
This paper discusses the
implications of the new
accounting standard
released jointly by the
Financial Accounting
Standards Board (FASB)
and the International
Accounting Standards
Board (IASB). ASC 606,
Revenue from Contracts
with Customers,
describes how companies
can leverage their
current SAP investments
and use an integrated
transition approach to
reduce compliance risk
and improve the revenue
accounting process.

Introduction

The challenges of transition

On May 28, 2014 the FASB and IASB issued their long-awaited converged standard on revenue recognition. The objective of
the new standard (ASC 606 and IFRS 15) is to provide a single, comprehensive revenue recognition model for all customer
contracts, improving comparability within and across industries, as well as across capital markets.

Revenue recognition has routinely been viewed as one of
the most difficult finance and accounting processes to get
right. It represents one of the highest risks of material error
on financial statements, and it is one of the leading causes of
restatements. As companies move to the new standard, their
compliance risk is likely to increase unless they have a wellplanned, comprehensive approach to adoption. For example,
according to a recent poll from a PwC-SAP webcast, less than
10% of respondents said that their current financial systems
support revenue accounting processes in the context of the
new standard, meaning a high proportion of companies are
exposed to revenue compliance risk. There are a number of
reasons why the transition could be especially challenging.

The new standard embodies a major shift in how revenue will be recognized in many organizations. Management will
need to perform a thorough analysis of existing contracts, business models, company practices, and accounting policies.
For industries that applied industry-specific guidance under the old standard—including software, construction, and
entertainment, media, and communications--the transition to the principles-based single standard is expected to be a
significant change.
The new standard introduces a five-step model (see Figure 1) that requires more judgments and estimates than the
approach it replaces. There is a transition period during which companies must recognize revenue under both standards in
order to allow investors to make accurate year-to-year comparisons.
Figure 1: The five-step model for revenue recognition
5-step model

1

Identify the
contract

2

Separate
performance
obligations

3

4

5

The implications of the new standard are far broader
than simply changing accounting and reporting methods,
although that change itself is highly complex. Because
so many parts of a business are tied to revenue, the new
guidance will have a pervasive organizational impact,
affecting such areas as executive and sales compensation,
debt covenants, taxes, and even product offerings and
how products are sold. Systems and processes will need
to change to accommodate the new standard, and an
entire education and training program will be essential
to retooling the organization to meet the standard’s
requirements. Communications with outside stakeholders,
including suppliers, customers, and to investors will be an
important part of the transition. None of this can happen
overnight. This transition is complicated and difficult, and
organizational leadership will need to be involved.

Recognize
revenue

Allocate
transaction price

Determine
transaction price

Current
US
GAAP

Dual reporting period

Revenue recognition standard transformation

Q2 FY14
May 28, 2014

Q1 FY15
January 1, 2015

Transitioning to the new revenue recognition standard

Q1 FY15-Q4 FY16
January 1-December 31, 2016

2

Reporting date

Increased judgment means increased complexity
The new standard is far less prescriptive than the current
rules, giving companies greater leeway when it comes to how
they price product and service offerings and set up customer
contracts. Organizations will rely more on estimates and
judgment in recognizing revenue; but with greater flexibility
comes the increased complexity of ensuring that revenue
accounting processes are compliant. Companies will need
to leverage automation to operationalize estimates such as
stand-alone selling price, as well as streamline the multipleelement arrangement (MEA) approval process so that the
revenue team can use judgment in situations where contract
terms are complex.

The finance workload during transition will
increase significantly
The new guidance sets a 2017 effective date that will call
for most companies to go through approximately two years
of transition. The question is, is that enough time? Polling
conducted during a recent PwC-SAP webcast1 showed that
only 38% of respondents believe enough time exists for
their company to adequately prepare for the new standard’s
effective date. This suggests companies need to already be
thinking about the transition.

Figure 2: Adoption timeline for the retrospective transition method

Date of transition

Most current financial systems have not been able to handle
the revenue automation requirements of evolving business
models and solution bundling in the context of current
GAAP. For example, multiple-element arrangements,
revenue allocation, and contract provision-related revenue
holds are handled manually. Transition to the new standard
will involve dual reporting apart from the changes to
revenue recognition rules. Disclosures also need to be
considered in this transition period, as reporting will require
significant manual effort and time. It is therefore important
to focus on upgrading revenue automation capabilities as
part of the new standard adoption.

Accounting is just the tip of the iceberg

The new guidance is effective in 2017 for public companies. Companies can either elect to apply the standard retrospectively
(applying it to both current and prior years) or use a practical expedient—a prospective process with a cumulative catch-up.
The timeline in Figure 2 indicates the key milestones of adoption assuming the retrospective transition method. Given the
pervasive impact of the new standard on data, systems, processes, and controls, companies will need to get started on their
transition efforts well in advance of the effective date, especially if they choose the retrospective approach. They will also need
to look for ways to streamline the transition, automating processes to ease workloads. For companies that use SAP as their
finance platform, the Revenue Accounting and Reporting (RAR) solution will be available as part of their licensing agreement.

Final standard
issued

Most existing financial systems are not adequately
equipped to handle the transition

During this time, companies will need to present their
financials using both the current and new standard. This
places a significant burden on finance staff—especially since
much of the work done to reconcile the revenue accounting
for bundled contracts is done manually via spreadsheets,
a process that is both time-consuming and subject to
human error. Simply throwing more bodies at the problem
may not be practical in the long run. Companies will likely
need technology solutions that can reduce the amount of
manual calculation involved in accounting for revenue and
related costs.

New
US
GAAP

FY17
January 1-December 31, 2017



3

Transitioning to the new revenue recognition standard

The importance of an integrated
approach

Mitigating transition risk through
SAP automation

Many companies may take a narrow view of the transition, focusing solely on changes to accounting policy. This could be
a mistake. Developing a thorough and holistic approach to the transition can help a company not only think through how
the new standard will affect its business models and processes, but also involve stakeholders across different workstreams
well in advance. Figure 3 outlines some of the primary responsibilities across five workstreams that are part of an integrated
approach. Employees managing each of these workstreams need to consider a number of factors in planning for the
transition (see Transitioning to the new standards: Key considerations).

SAP’s RAR solution will support the automation capabilities
needed for transition to the new standard. Companies that
currently use SAP financials can leverage this new solution
to address their revenue automation needs.

hold processing, and financial posting via ERP integration.
However, revenue trigger automation is limited by the
data capture within the ERP and fulfillment/provisioning
systems.

Revenue Allocation: These capabilities reduce compliance
risk by automating accounting policy rules and improving
the efficiency of contract identification and assessment. The
SAP RAR solution contains revenue allocation capabilities
such as MEA (multiple-element arrangement) determination
rules and MEA revenue allocation rules.

Revenue Reporting: These capabilities reduce compliance
risk by providing visibility into revenue disposition and
improving operational efficiency of revenue reporting. SAP
RAR provides operational reports, however data can also
be extracted and funneled to downstream BI systems to
support management and statutory reporting.

Revenue Recognition: These capabilities reduce
compliance risk by providing an audit trail of revenue
triggers and account postings to operational contracts.
The SAP RAR solution supports revenue recognition
capabilities such as MEA processing and approval, revenue
recognition of distinct performance obligations, revenue

Quote-to-Cash Data Integration: These capabilities
enhance data quality and improve operational efficiency
by automating upstream system integration. The SAP
RAR solution provides sales and distribution integration.
However, integration of project systems and billing and
revenue innovation management is not yet available.

Figure 3: An integrated framework for transitioning to the new revenue recognition standard

Accounting oversight
Ensure accounting
policy alignment across
the organization
Collaborate with
IT team to ensure
accounting inputs into
system design, testing,
and training
Review business
requirement and
functional design
specifications

Systems
implementation
Develop and manage
the overall project plan,
including resources,
activities, and costs
Implement a strong
program infra-structure,
including best practices
and frameworks for
quality
Integrate all
workstreams
and establish a
comprehensive
governance model

Program management
Facilitate the future
state process and
enable capabilities
working with finance
and accounting
departments
Implement the solution
and prodive inputs to IT
Work with program
management team to
develop a standardized
approach and to track
program progress

PwC delivers an integrated approach in three phases. Each
phase includes steps for the five different workstreams—
accounting oversight, program management, systems
implementation, data, and organizational change
management — that are involved in the transition:
• Assess: The Assess phase is critical to determining how
the new standard will impact the organization and what
types of training and communication will be required for
a smooth transition. During this phase the organization
builds a solid framework for the transition, establishing
proper structures for governance, project management,
and change management. PwC also recommends
conducting a Revenue Automation Assessment to
understand the current revenue accounting process,
capability gaps, and data quality scoping.
• Convert: During the Convert phase the organization
decides which adoption method (retrospective or
practical expedient) it will use. This important decision
will depend on whether the organization has the
resources available to implement one method more
effectively than the other given the timetables for each.
The company also identifies what changes it will need to
make to its business models, processes, and systems as
well as what training and communications it will need
Transitioning to the new revenue recognition standard

Data
Develop the data
migration strategy
Integrate with
accounting oversight
and systems
implementation
teams to enrich and
convert data based
on policy and system
requirements

Organizational change
management
Determine the
organizational impacts,
training strategy, and
post-go live support
model
Collaborate with
program management
and systems
implementations teams
to lead employee
mobilization, training,
and knowledge transfer

Conclusion

Establish program
activities and
milestones and execute
communication
strategy

While the impact of the converged FASB/IASB revenue
recognition standard will vary depending on the company
and the industry, it is likely to extend well beyond mere
accounting policy. In preparing to adopt the new standard,
companies will need to scrutinize many aspects of their
operations, from business models to how they sell to
customers. They will also need to address the standard’s
complexity, looking for ways to lighten some of the burden
on their finance staff via automation of revenue accounting
processes. By combining automation with an integrated
approach to adoption, companies can help facilitate a
smooth transition while reducing their compliance risk.

to develop for internal and external stakeholders. The
IT and finance teams conduct a data quality assessment
to determine what needs to be done to improve data
quality in preparation for automation.
• Embed: The accounting team drafts disclosures for
both the transition and post-transition periods and
begins communicating policy changes to stakeholders,
including outside investors. IT builds, tests, and deploys
the automation solution and performs mock and final
data conversion.

• Have you considered transition method and dual
reporting needs as part of the data migration strategy?
• Have you established a program governance structure to
enable quick decision-making across functions?
• Did you perform a stakeholder assessment to gain crossfunctional support for the transition initiative
Additional Resources:

SIDEBAR: Transitioning to the new standards: Key
considerations

By including each workstream throughout the three
phases of the process, companies can address frequent
interdependencies in a thoughtful and timely manner.

• Accounting for revenue recognition: http://www.pwc.
com/us/en/audit-assurance-services/accountingadvisory/revenue-recognition.jhtml

• Have you considered future business models and goto-market approaches while assessing the accounting
policy impact of the new standard?

PwC is taking a proactive approach to this new standard.
By working alongside SAP and providing feedback on
the beta version of the RAR module, PwC has marshalled
its accounting policy professionals as well as its SAP
competency team to work on ramp-up versions of the
solution at various client sites. With an in-depth system
capabilities list, templates, and an integrated approach, PwC
can use its proof-of-concept experience to help companies
accelerate their timeline for adopting the new standard.

4

• Is your future-state solution architecture defined
and did you perform a fit/gap analysis of revenue
automation solutions compared with future-state
capabilities?

• PwC Guide to Revenue Recognition Website: http://
www.pwcrevrec.com/

• Did you define the MEA (multiple-element
arrangement) use cases, revenue streams, and revenue
accounting scenarios that are representative of sales
transactions?

1 PwC & SAP Oct. 30, 2014 webcast “How companies can adopt
the New Revenue Recognition Standard while leveraging their
SAP Investment.”

• Have you identified the revenue automation capabilities
needed to support the future-state revenue accounting
processes in the context of MEA use cases, revenue
streams, and revenue accounting scenarios?


5

Transitioning to the new revenue recognition standard

Contacts
For more information, contact:
Sriram Nagarajan
Partner

Clifford Eng
Partner

[email protected]
(612) 326 2048

[email protected]
(312) 298 2525

Arnold Nel
Principal

Ravi Krovidi
Director

[email protected]
(408) 817 7407

[email protected]
(408) 817 4196

© 2015 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity.
Please see www.pwc.com/structure for further details. We are proud to be an Affirmative Action and Equal Opportunity Employer. MW-15-1249 MZ

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