Listen to the latest episode of Bramasol’s Insights to Action Podcast Series. In this episode, Darrell Latchford, CPA provides a deep dive into the lessons learned from implementing ASC 606, with particular emphasis on the “ripple effects” on other enterprise-wide processes, such as budgeting, forecasting, internal controls, sales commissions and more.

Also, below is a transcript of the podcast episode:

Jim Hunt: Hello, this is Jim Hunt for Bramasol’s Insights to Action podcast series. Today. We’ve got a really interesting topic again about RevRec and lessons learned. And we’re lucky to have Darrell Latchford, who is a CPA with over 14 years of revenue management and accounting experience, including 12 years of Varian Medical Systems, most recently as the Director of Global Revenue. He had the responsibility for over $3 billion in revenue and he led his team through the end-to-end migration risk assessment and implementation projects to successfully adopt ASC 606. So he’s perfectly positioned for today’s topic, which is kind of a hands-on, down-in-the trenches review of lessons learned and understanding the ripple effects from other functions. Darrell, Hi, it’s great to have you here.

Darrell Latchford: Thanks Jim. I’m happy to be here.

Jim Hunt: Let’s start with kind of an overview of how ASC 606 impacts various functional areas beyond RevRec compliance, and then we’ll dig deeper into each of those areas.

Darrell Latchford: Yeah, that’s great. Well, as, as everyone knows, revenue is one of the most important financial indicators that external parties rely on determine how well a company is performing. And as a result, businesses often establish a number of internal processes and management reporting capabilities to drive growth and increase the predictability of the revenue streams. As a result of the accounting and reporting changes that we see from ASC 606, companies need to address the impact on the rest of the external stakeholders that rely on these revenue numbers. These different areas may include FP&A, tax, commissions, and regulatory, along with any new revenue streams that may come about as a result of these standards. These different process owners will need to receive financial reports and understand what’s going on with their business.

Jim Hunt: Okay, great. Why don’t we just dig into some of the areas? So let’s start by taking a deeper look at budgeting and forecasting, and what the impacts are.

Darrell Latchford: Yeah. Budgeting and forecasting. This is a key area, um, because obviously really drives where you allocate your resources across the business. So when you have these changes that are come about as a result of the new revenue standard, there’s going to be a shift to where some of the dollars are going to be. You’re going to have additional performance obligations that are now going to be a revenue stream, which weren’t in the past. There’s going to be an impact associated with the adoption, so that needs to be factored into your forecast and your budgets for the upcoming year. And then the other thing to keep in mind is there can also be a shift in timing. So that’s another factor that you need to consider when you’re doing your planning. If you fail to take into account all these different changes, you’re going to end up with a budget that’s set up under the old standard, and you’re gonna report your actuals under the new standard. It’s going to give you faulty information, and you’re going to be making decisions based on a bad set of information.

Jim Hunt: So integration is key there, and kind of building off of that, what about issues around financial reporting itself?

Darrell Latchford: As an accountant, I have a tendency to focus more on the external reporting, but it’s really key that you consider these changes to the business. Uh, from an internal perspective, you need to think about how these impacts are going to affect your taxes, how it’s going to affect your statutory books. And most importantly, how it’s going to affect your management reporting, because that’s really what the internal stakeholders use to help them make the decisions and, and, and move forward.

Jim Hunt: Yeah. And I would guess just kind of a segue off that financial reporting issue, I guess, that integrated analytics are a really key factor in being able to achieve the reporting in a productive fashion and timely fashion.

Darrell Latchford: Absolutely. I think that you’re going to perhaps reset the metrics that you rely on internally, or maybe you missed some metrics that you report externally that are going to have to be adjusted and perhaps updated.

Jim Hunt: Okay, great. And then obviously there’s the reporting and compliance, they’re all built on a foundation of internal controls and I assume there are certainly impacts from ASC 606 on internal controls.

Darrell Latchford: Yeah, absolutely. Jim, under ASC 606 you know, there’s been a shift to a more principle-based revenue standard that includes more judgement and additional estimates that now need to be included as part of the revenue process. And also we see an increase in the number of performance obligations and additional reporting disclosures that all require operational changes and to the accounting and reporting systems. These changes definitely will result in increases to the controls environment. And I would, based on my experience, I see that it’s, it’s not decreasing. We see additional controls that need to be implemented, and this is a key area and definitely make sure to get internal audit involved throughout the process.

Jim Hunt: Yeah. I was going to ask about building in audit trails, both internal and external. You want to be able to prove and show your work for all of these new changes. So it seems like ensuring that you’re integrated where you have a robust audit trail and auditability is really important.

Darrell Latchford: Yeah, and I think also the other area is not just on a go-forward basis, but you also need to be able to have the records to show the changes that you made ,that you’re in compliance, and making your adjustments and your calculations, as a result of changing over to the new standards. So it’s not just the go forward to be processed, but you also need to make sure that the records and the adjustments that you’re making along the way are also, auditable.

Jim Hunt: Right. And I would guess that, from a public company standpoint, especially where you’ve got external investors and stakeholders, you’re going to need that look-back and look-forward capability to explain any changes in the financial reports.

Darrell Latchford: Absolutely. You know, I can’t stress enough, the level of effort and when we went through our adoption and throughout the process, we were engaging internal audit and external audit and it proved very helpful because if perhaps there’s an adjustment along the way, or perhaps the auditors don’t agree with one of the changes, it allows you to recover and make changes along the way to make sure that when you get to your end result, you don’t have any issues.

Jim Hunt: In your projects, did you run parallel with the old system and the new system for a significant period of time?

Darrell Latchford: No. What we did is actually the full retro retrospective. So we had to come up with a process to capture the revenue recognition for the previous three years under both ASC 605 and ASC 606. If you’re running the modify, then there is that need there to run parallel systems. Regardless it’s a lot of work and you just need to make sure that you’re able to capture the information under both scenarios.

Jim Hunt: Got it. Let’s switch to the sales side because obviously changes in revenue affect sales. Cause that’s where it comes from. And specifically like managing commissions and other aspects. Can you kind of elaborate on those issues?

Darrell Latchford: Sure. Yeah. And sales commissions were one of those areas that initially we did not feel that there was going to be an impact, but there actually was a impact in that the commissions piece is kind of a double whammy in the sense that that’s typically not a large material impact, however, trying to get the systems and the process in place to account for it is a little bit challenging. And as operationally companies go through their planning cycle with the sales team, they set the quotas and you need to make sure that you’re engaged upfront so that when you’re setting those quotas, you’re setting them under the new standard. Because if you set them under the old standard, you’re going to get to the point at the end of the year, you know, their quotas have been set based on perhaps a lower quota amount. And you’re going to be reporting it under the new standard, which might bring down their quota. And you definitely don’t want your sales guys upset. So it’s an area that needs to be flushed out, needs to be incorporated into the sales commissions plans, because it’s one area that you, you definitely don’t want to have challenges or get sales guys upset. You want them out selling.

Jim Hunt: I understand. The sales guys in my experience have an eagle-eyed focus on the comp plan and what it means to them.

Darrell Latchford: Exactly. And I think it’s just critical that it’s another one of those stakeholders. You need to engage the sales operations team, make sure they understand the changes and how that’s going to look going forward so that when you’re measuring their performance, that they’re able to understand it and realize what the changes are. And then I think, lastly, make sure that whatever commission tool that you utilize, that it’s been updated and adjusted for the new standard as well.

Jim Hunt: So that sort of plays into my next question about order bookings and backyard managements, um, how the river changes have impacted that. Yeah. And that’s a good point. We talked a bit about metrics and analytics earlier and order bookings and backlog are definitely two of the key metrics that I see a lot of businesses using and tracking.

Darrell Latchford: Even if it’s not something that’s that they publish or include in their financials it is still a key metric that needs to be accounted for. And as you go through and you’re converting over from ASC 605 to ASC 606, you need to make sure that you’re readjusting your backlog to reflect that. So if you’re accelerating revenue, then you’re going to have a lower backlog or vice versa. So it’s key that you have a plan upfront to determine how you’re going to adjust my backlog and what is my backlog going to look like? What’s the allocation going to look like between the different elements. It’s one of those things that you might not think about upfront, and you probably have to wait until closer to the adoption date to see what you actually have left in your backlog, what open contracts, but it’s still something that I highly recommend that people think about include as part of their planning, to make sure that they don’t get to that point. And they’re not rushing around trying to figure this out.

Jim Hunt: Yeah. And to be able to predict what those changes are going to look like, because you certainly don’t want the CEO to suddenly be saying, Hey, the backlog just dropped by 50%. What’s going on here?

Darrell Latchford: Absolutely. Yeah. Good point. Um, this is a great overview.

Jim Hunt: So what should companies be doing now? I mean, consider the Bramasol paradigm of Comply, Optimize, Transform, where a lot of people just kind of focused on compliance. “Let’s get this done”, but what should companies be doing now to be sure that they’re integrated and optimized, and have the RevRec changes built into their overall business systems?

Darrell Latchford: Well, I think as podcast titled, you know, don’t underestimate the ripple effects, I think this is to make sure that you’re integrating all of the areas that are impacted and not just focusing on the compliance aspect. You know, we touched upon a number of areas that are often maybe underestimated or not addressed during the planning stages. As a result, you get into the project, the implementation, and you get closer to that go-live date and you realize, “Oh, I forgot to really plan for this”. Or you’re in a position where you haven’t had a chance to really include it in your planning process to enable you to implement some automation, some integration into whatever tool it is that you’re deciding you want to go with.

As a result, you may have to do some rework to what you’ve already built. You may have to implement some manual processes and you also run the risk of not being able to meet your go live date. So, you know, as we go through this, I just have a couple additional areas or bullet points, recommendations that I would suggest that people consider when they’re, when they’re going through that. As we touched upon, one key is make sure you include all functional areas when you’re doing your initial impact assessment, so make sure that you get those individuals involved. Review the results of the impact assessment with the stakeholders, make sure that they understand what’s changing. And if you have a recommended approach, make sure that they’re engaged and involved and understand what that’s going look like.

Also, look to automate and standardize your systems and processes. I think that’s a key thing. And, when I talk about the automation, don’t just look at the pure financial accounting, the compliance aspect, look at how you can standardize and automate your operational processes. And your stakeholders will love you for that.

Darrell Latchford: Also, as we mentioned, don’t treat this as a compliance exercise. This is more. Think about this as an investment in the infrastructure of the organization. Make sure to address all required reporting and SOX controls. And what I think is a key point here is don’t just think about those that you do on a daily, maybe monthly basis. Think about all those controls, because you’re going to have some controls that you just do on a quarterly basis, or there’s some that you might only do on an annual basis. So make sure that you build those out and test those areas.

What I strongly recommend is make sure that you identify a change management lead, who’s responsible for keeping all the stakeholders informed and engaged throughout the project. That’s one of those things that’s key – having somebody who has kind of a kind of project manager, with a bird’s eye perspective on this, because it’s tough to get it. You get involved in the weeds in it. You really need somebody to make sure that interaction is happening on a regular basis. And then as you’re going through this process, you might not get all the budget that you want, or as you’re going through this, initially, you might identify some opportunities, but you might not have time to implement those. I strongly encourage people to make sure to make note of those areas. Present those to your senior management and see about getting a budget for a phase two effort. I think it’s going to be well worthwhile.

Then, you know, one key thing here is, before ASC 606 prior revenue recognition guidance was kind of built in bits and pieces. So people and systems had to get adjusted on a continual basis as changes came out. The one beautiful thing about having ASC 606 is the full process is laid out today. And so you can really, earmark and create a system to support that because the, the basic structure is not going to change. So, those are some of the key areas that I’d recommend.

Jim Hunt: That’s a great wrap up. And, I love your note that, with ASC 606, there’s really an opportunity to become more efficient and integrated because it’s mapping out the entire process instead of the old piecemeal incremental, built up over time approach that we had previously. Darrell, I really appreciate your insights on this, and I hope to have you back in the future to talk more.

Darrell Latchford: Alright, Jim, thanks. Have a good day.

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