RevRec Ready Hot-Tip #15 – Choosing a Full or Modified Retrospective
Choosing a Full or Modified Retrospective
One of the key first steps for implementing the new Revenue Recognition standard is to determine which adoption method, full retrospective or modified retrospective, will be used. This key decision will depend on several factors including resource availability, reporting requirements, and timing of the project. When you convert to the new method of recognizing revenue, the previous years of recognized revenue need to be migrated over so that you have the complete picture for ongoing contracts and revenue streams.
Companies basically have to choose between two options for adoption:
• Full Retrospective: Under this option you have to recast previous financial statements as if the new guidance had always existed for a comparative two-year period prior to the adoption year. This approach can require significant time and effort – unless you leverage the opportunity to start collecting data sooner by running the new system in parallel.
• Modified Retrospective: Under this option, companies can choose to report their financials under the new rules in the adoption year and also include full disclosure accounting for the same year under the legacy guidance. Not only does this put extra pressure on the closing process by having to close the books twice in every quarter; it also has the potential for “lost revenue” if the new guidance recognizes less revenue than the previous method would have in a particular period.
In either case, it is critical to begin understanding the implications for your specific business situation now so that that you can choose the best path forward and minimize any extra work or disruptions.
Once the adoption method is determined, future decisions become much easier. The next step is to use a Proof-of-Concept that enables you to begin modeling and testing the specific business cases and processes that are relevant to your specific situation.