09 Oct ASC 606 for manufacturing: Who, what, and why?
by Scott Harrington
There is a misconception that revenue recognition is a task reserved for the back end of the business and that it doesn’t hold much weight on the front end of operations. But under the new ASC 606 standard, this will not be the case, especially for manufacturers.
ASC 606 is still a new term for many executives outside of finance and legal departments, but it shouldn’t be. While most back office executives have been planning and prepping for the new compliance regulations, they have not hit the front office yet. Major changes are on the way, and CPQ can provide the tools you need to track and report on revenue recognition. Let’s take a look at the implications that ASC 606 will carry for your manufacturing business.
What is the ASC 606?
The Financial Accounting Standards Board (FASB) is replacing the Generally Accepted Accounting Principles (GAAP)’s existing rule-based methodology with a single revenue recognition principle. Regulation is changing due to significant differences between United States and international accounting, standards, and processes. In the United States, the GAAP supported by the FASB does not provide an accurate comparison with the standards of the International Accounting Standards Board (IASB). Therefore, a revision of GAAP has become necessary to support the convergence of IASB and FASB and create compliance with the international system.
The new revenue recognition standards go into effect for companies whose fiscal year starts on or after December 15, 2017. This means that companies must adopt it for that year going forward which–for most companies–will be their 2018 or 2019 financials.
Who is affected?
It’s not just the finance and legal departments that will feel the effect of the new revenue recognition standard. ASC 606 can have a major impact on sales and marketing efforts. It will affect pricing, discounting, product bundling, services, and how you go to market.
Even though accounting might have been working on this, a siloed organization is not going to be alerting the other departments such as sales and marketing. This can have a drastic effect on how certain products and services go to market—from boilerplate sales and discounting to even how goods are promoted at trade shows.
Why is it important?
The manufacturing industry is notoriously slow at adopting new technologies and practices. As such, they don’t really have the tools put in place to capture the information they need in the presales process.
Every manufacturer has tons of contracts and invoices. Now, they are having to go backward and spend valuable time trying to unbundle services, products, and discounts, and then apply the revenue rules appropriately. In doing this, they have to keep two sets of books to manually keep track of all the changes they are making. As a result, the whole company has to put the brakes on any other initiatives that help promote business.
CPQ can automate this whole process
Some companies have whole teams of people going through old contracts manually, trying to prepare for the changes going forward. As aforementioned, this costs time and resources and stifles normal business operations.
A CPQ solution for manufacturing will considerably defray the back pedal work that is required of a company to prepare itself for the rules of ASC 606. You can automate these time-consuming tasks, freeing up your employees to get back to the work that stimulates your revenue instead of looking backwards to make sure you’re compliant with new revenue standards.
ASC 606 is going to completely change the way that we think about recognizing revenue. Is your manufacturing business ready for the implications that will follow? Perhaps it’s time to look into a CPQ solution for your business.