Public and private companies alike are at varying stages in adoption of the new revenue recognition standard, Revenue from Contracts with Customers. Many finance and accounting departments have experienced challenges in understanding and implementing the new rules as it applies to their business because the new ASC 606 guidance has proven to be more complex than initially anticipated.
A survey conducted by Ernst & Young found that many companies may have missed opportunities to ultimately transform their businesses for the better. They released findings in an article saying, “43% (of companies) report that they are too focused on getting the new standard’s financial reporting and disclosure tasks completed to be able to unlock broader business benefits. More than 50% of respondents cite the burden of legacy IT and systems complexity as a barrier…”
The compliance deadline for public companies has arrived, the pressure is on, and companies are rushing to comply. In the Bloomberg Accounting Policy and Practice Report, Derek Bradfield, a Deloitte audit partner co-leading its revenue recognition consulting effort, explained that many companies are turning to “ad hoc” solutions like manual-based excel spreadsheets for the first year, while planning “to adopt again next year to get it right.”
In theory, spreadsheets are a wonderful, easy-to-use, free, and accessible tool. But the reality is, a “brute force” spreadsheet-based accounting approach just doesn’t cut it. When it comes to complex revenue recognition scenarios, tracking revenue in excel is a painstaking process that takes up valuable time; something most revenue managers don’t have enough of. It’s important that companies understand that this type of “brute force” approach comes with complexities. Below, we’ve outlined five very important reasons why finance and accounting departments shouldn’t rely on excel spreadsheets for ASC 606.
- Excel is error-prone: The risk of finding accounting errors in spreadsheets is high, simply due to the prominent level of human interaction. According to a recent article on MarketWatch.com, 88% of spreadsheets contain errors. And the more complex the revenue, the more cumbersome and time consuming the spreadsheets become. Reviewing calculations and creating analytical reports can become extraordinarily tedious when revenue data contains complex scenarios such as contract modifications and significant financing components. The month end deliverables become more than just a “sanity check” amongst accounting departments to verify accuracy and ensure proper accounting treatment. Ultimately, accounting errors in financial statements could lead to revenue recognition misstatements, lost revenue, poor business decisions, or even financial failure.
- Excel is not secure: Security risks are also very high for finance and accounting departments that rely on excel spreadsheets to manage ASC 606. Spreadsheets are a static resource with limited transparency into tracking transaction changes. Excel is unable to provide a detailed history of changes made to a range of multiple transactions, let alone individual transactions, ultimately making auditing a company’s revenue in a spreadsheet a daunting and lengthy task. To make matters worse, most companies don’t password protect their spreadsheets, making businesses even more susceptible to cracks (and errors; please see number one).
On the other hand, automated revenue recognition software solutions provide audit trails and have established security controls in place that enable users to rely on the data output as well as track changes made within the system. A few simple changes such as individual logins and approval processes increase security protocols tenfold and maintain the integrity of confidential revenue date. Furthermore, revenue recognition software can break down very specific accounting functions including the time value of money, allocations, and multi-currency foreign exchange conversions by customer, order, or product group levels for an easily auditable data history.
- Excel is not intended for sharing: Spreadsheets weren’t really designed with revenue management in mind. Revenue managers spend significant time working with senior members of their team to ensure the company effectively complies with the new revenue recognition standard. Within enterprise level businesses, a staff accountant could be assisting in the completion of the month-end close process in conjunction with the Senior Manager of Technical Revenue Accounting, the Manager of Revenue Accounting, the Manager of Revenue Assurance, the General Ledger accounting team, members of the Billing Operations team, etc. Revenue reporting should be a collaborative activity with a range of individuals and systems, but Excel doesn’t allow for real-time editing between multiple users without a Microsoft Cloud subscription, and again, the audit log is difficult to decipher without significant legwork. Version control may also be a guessing game for enterprise level companies with multiple offices or departments all relying on the same spreadsheet, especially when the alternative may be saving these larger-than-life files in a shared working space – something we have all learned to loath.
- Excel is not an agile business tool: As your company evolves and grows, revenue data in spreadsheet-based systems get more widely distributed. There comes a point for a growing organization where limits are reached due to scalability. Excel is not an ideal solution for large corporations with multiple entities, multiple currencies, and high volumes of transactions. The seemingly infinite number of worksheet tabs eventually becomes a nuisance. As a company grows and demand for sales increase, a cloud-based solution will scale accordingly.
- Excel is not a reporting tool: How much flexibility is there in an Excel report? Are your revenue analytics presented in a way that is both intuitive and clear? Pivot tables and charts are nice, but could you do better? What about a deferred waterfall or a reconciliation report with the capability to drill down into details at the line item level? Automated revenue recognition software solutions provide analytics tools with customizable reports designed by you, as well as fully functioning dashboards with point and click configurations set to your specificity with drill down to the most granular level of your data.
Automation: The Smart Alternative to Spreadsheet-based accounting
Are you wishing you could upgrade from a spreadsheet, yet? Relying on spreadsheets to implement revenue recognition should really be a backup plan. PWC agrees, quoting, “Because a manual approach can involve higher risk of human error and resource requirements, it shouldn’t be considered a replacement for a sustainable long-term solution, but rather an interim approach or a necessary complement to it. Companies should consider a structure that will help them progress toward a more permanent, automated solution even while implementing a partially manual approach.”
In an interview at the Financial Executives Internationals Current Financial Reporting Issues conference in New York, John McGaw, the Americas accounting change leader at Ernst & Young, was quoted saying “Companies that became involved earlier in the process found ways to drive other business benefits from the adoption of the new standard. If the revenue automation or enhanced processing technology can drive more efficient, faster, well controlled external financial statements, they’re also seeing ways to drive management reporting and better business insights from the process.” This implies those transformative business opportunities can be derived from the implementation of automated revenue management solutions.
Implementation and execution of the new revenue recognition standard doesn’t have to be as risky or burdensome as it is in spreadsheets. Dedicated solutions increase transparency into revenue management and accuracy of revenue data, as well as allow for end user reporting capabilities that extend far beyond those available in Excel. Imagine a world where revenue managers are analyzing data and making sound business decisions, rather than processing transactions. Be an early adopter; automate revenue recognition.
Softrax has provided revenue recognition software since 1999. Our automation solutions are quick and easy to implement, click here to learn more.