High Performance Finance: Enabling Oversight through Process and Organizational Excellence Introduction

With the announcement of the new converged standard on revenue recognition on May 28, 2014, the Financial Standards Board and the International Accounting Standards Board (“the Boards”) have concluded their multi-year effort to streamline and improve this key area of financial reporting.1 In the process, the Boards have adopted sweeping changes to revenue accounting regulations with significant impacts to a broad spectrum of companies across many industry groups in the jurisdictions under US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). In light of the new standard, chief financial officers (CFOs) will need to re-evaluate their current revenue accounting processes, organization and systems and assess what changes are required to maintain compliance with the new guidance for annual reporting periods beginning December 15, 2016.1

1 While revisions to accounting In addition to assessing the guidelines are frequent and companies impacts of the new guidance on are typically adept at conforming the organization’s end-to-end to new guidance, in our view this revenue process and the supporting particular change is fundamentally technologies, we believe CFOs different for a number of reasons: should also be cognizant of:

• The scope of the new standard on revenue • The likely need for additional data recognition is significant as it seeks and analytics to support the greater to encapsulate the current complex, requirement for estimates and detailed and disparate revenue guidelines judgments under the new regulations. into one set of guidelines standardizing revenue accounting treatment for • The need to have data and processes economically similar transactions. which will support and reconcile the external financial reporting view, as • The use of bundled arrangements, complex required by the new statutes, along with pricing arrangements and a variety of sales a management view which highlights the channels result in revenue accounting economic profit of the transactions. becoming a highly complex process and affecting many company functions such • The potential benefits of investing as finance, information technology, human some effort to assess current resources, sales, legal, and supply chain. contract governance and standardization in the company. • Many enterprise resource planning (ERP) systems currently do not support key • The opportunity to assess the current aspects of the new guidance. Thus, CFOs talent and organization and validating may need to explore the potential use of the need for a balanced skill-set in bolt-on and custom technical applications technical accounting, contracting, for either a permanent solution or to product management and data analytics bridge the gap until ERP vendors have to support future revenue processes. put compliant technology in place. Most importantly, though, progressive CFOs will • The time between the announcement and likely see the need of adapting to the change the effective date of the guidance appears in compliance as a welcome opportunity to to be deceptively long. This may provide a explore broader value-generating initiatives false sense of security to companies with beyond the revenue accounting process and respect to the time they have to comply thereby leverage the need for compliance into with the new guidance. The degree of potential savings and greater effectiveness change required for some companies may in managing the company’s business. be significant and entail fundamental changes to process, organization and technology, so in our view a proactive approach to assessing the implications of this guidance to the business is paramount.

2 Impacts of New Regulations

The core principle of the new guidance is based on the expected entitlement of consideration in exchange for goods and services, and it needs to be applied uniformly to all companies irrespective of industry affiliation.

At this time, there are a number of publications available from a variety of sources with detailed discussions on the substance and the technical accounting implications of the new guidance. These will provide solid reference points for the specific technical accounting considerations that may be important to companies in their respective industries.

3 For our purpose, we will simply call There are three key areas of complexity 3. Compliance with a cohesive set of out the 5-step model put forth by in this model with the potential financial disclosure requirements the Boards to determine revenue to require significant change in including disclosures for revenue breakouts, contract balances, performance recognition for revenue derived terms of revenue accounting obligations, and significant judgments 1 1 from contracts with customers: processes and technologies. or changes in judgments made in applying the requirements to contracts. 1. Identify the contract with a customer. 1. Reliance on estimates and judgment in Based on our broad client experience various stages of the revenue recognition across industry groups, the impacts of 2. Identify the performance obligations process, such as determining consideration the new standard are far-reaching from (promises) in the contract. and for the purpose of an industry perspective and Figure 1 inclusion in the transaction price. 3. Determine the transaction price. outlines examples of potential impacts. 2. Management of variable consideration 4. Allocate the transaction price to the – whereas variable consideration such performance obligations in the contract. as bonuses, penalties and refunds 5. Recognize revenue when (or as) were often deferred, they will now the reporting organization satisfies need to be included as an estimate a performance obligation. in the consideration for performance obligations if they are probable.

Figure 1. Potential Industry Impacts Related to Revenue Recognition Guidance

Industry Potential Impacts

• Elimination of contingent revenue cap Naturally, the change impact will be Communications • Variable consideration in network access contracts dependent on the nature of a company’s • Additional performance obligations may exist (activation and installation services) revenue arrangements and companies in some industries will experience greater • Elimination of software-specific guidance change than others. However, it is our view • Elimination of residual method that all companies will be impacted to Technology • Variable consideration in SaaS arrangements • ‘Right to Use’ versus ‘Right to Access’ software some degree, and this by virtue of the new • Additional performance obligations may exist (online video games) disclosure requirements which may require changes to systems and processes to enable compliance with the new regulations.2 Pharmaceuticals • ‘Right to Use’ versus ‘Right to Access’ intellectual property and Life Sciences

Aerospace and • Treatment of long-term construction and maintenance contracts Defense

Engineering and • Revenue recognition based on transfer of control Construction • Variable consideration in milestone arrangements (performance bonuses)

Retail • Impacts of customer incentives and loyalty programs

Source: Accenture, based on our experience and analysis of publicly available documents and publications, December 2014

4 Finally, there are also significant cross- In summary, we see the changes to revenue functional impacts that should be recognition guidelines as far-reaching not considered as companies assess the process only in terms of the actual scope of the and organizational change required to guidelines themselves, but also as they comply with the new regulations. Figure transcend the traditional finance boundaries 2 gives an indication of the breadth of of the revenue accounting process, and can the affected functional business units thus demand a complete examination of and business partners as well as the the end-to-end revenue process. The goal need to consider corporate policies, here is not just compliance but also the contract and data governance, and the transformation of the company’s revenue adequacy of enabling technologies. function through cost optimization, better shareholder stewardship through robust and reliable revenue reporting, and concrete value-generation for the business through extending compliance-mandated capabilities such as analytics to other business functions.

Figure 2. Selected Functional Impacts of New Revenue Recognition Guidance

Revenue Recognition Accounting

Operations / Fulfillment Customers Delivery systems Contracts Pricing

Marketings / Sales Investment Community Standard product oerings Financial statements Product pricing / Quotes Impacts and disclosures

Competitors Legal Go-to-market strategies Contracts Bundle pricing Approvals Finance Human Resources Accounting Compensation systems Financial planning Talent retention / Training and analysis Tax / Treasury

Source: Accenture, December 2014

5 In our view, the key building blocks of a high-performance revenue function include:

• A leading-practices infused process;

• Technology that enables compliance and brings a sophisticated level of automation to the revenue function; and

• An effective organization with a clear mandate of functional stewardship, optimal management of talent, and a clear understanding of roles and responsibilities.

Let us examine each of these building blocks in turn.

6 Leading Practices in Revenue Recognition Solutions

Compliance with the new revenue Analytics is a common component of an End-to-end Revenue overall revenue solution. This becomes even standard can be a very costly Accounting Process View and complex endeavor for many more critical under the new guidelines. Analytics solutions typically are used to Figure 3 provides an illustrative view of an companies. This is due primarily to derive the fair value prices of products, end-to-end revenue accounting process the fact that revenue accounting services, licenses and other sales transactions. typically seen in companies with high dollar, derives its primary inputs from the A leading practice in our view is to extend low volume transactions and highly complex this functionality beyond compliance to “Opportunity to ” and “Supply revenue contracts with customers. Many predictive models to support go-to-market Chain” process areas and then in factors complicate the end-to-end view strategies and customer and profitability turn outputs revenue information to and each company will have a different analysis. In our experience, a leading practice set of challenges. For example, companies numerous other process areas, such as revenue solution uses analytics not only for with standardized product and contract financial reporting, financial planning compliance but to drive additional value data may be able to identify performance and analysis, forecasting, and tax through more informed decision-making. obligations and allocate contract price with and statutory reporting. Developing As a strategic initiative, companies fewer process steps than companies that revenue processes and systems may may achieve the following benefits have more variability in their data set. be straight-forward or highly complex from a revenue accounting solution: depending on the ability of the In our view, the process areas in Figure 3 • Reduced risk of non-compliance. are those typically impacted by the new related process areas to provide and revenue recognition guidance. We evaluate receive the required information. • Improved reporting and transparency. the impacts by process area, looking for integration and approaches to streamlining, • Improved Sarbanes-Oxley controls Revenue accounting is not a standalone standardizing and simplifying process areas. and testing. process area to be viewed in isolation. As such, Accenture encourages its clients • Streamlined and standardized Key Process Recommendations to adopt a transformational approach to contract, customer, and product revenue accounting compliance projects. information to improve compliance As shown in Figure 4, there are two very In our experience, revenue accounting in a cost effective manner. simple questions that the revenue process involves over 20 finance process areas. When needs to answer: how much revenue can be you consider that these processes may be • Facilitated close process through an recognized and when can it be recognized? supported by disparate systems and data integrated end-to-end revenue process. structures, compliance risk can increase • Improved and expanded analytics for exponentially. A broader transformational customer and profitability reporting. journey may be required to provide compliance but also to focus attention on driving cost savings through standardization and simplification of other process areas.

7 Figure 3. End-to-end Revenue Process View - Example

Over 20 processes across Order to Cash, Supply Chain, Revenue Accounting and Record-to-Report are impacted

Manage Manage Contracts Fulfill Orders / Invoice Manage Sales Orders Contracts Customers and Reporting

Maintain Accounts Develop Develop Maintain Revenue Clauses Identify Point Invoice Receivable Customer Contract Contract Lines (Rebates, Acceptance, Other) in Time Triggers Customer

Maintain Manage Products / Pricing Manage Manage Filled Overtime Sales Orders Define Products / Performance Obligations Establish Pricing Contracts Reporting / Analytics

Identify Contract Allocate Price Recognize Revenue with Customer Separate Performance Recognize Maintain Selling Obligations Single Product Determine Price Hierarchy Transaction Price Recognize Standard Bundle Allocate Price Recognize Full Contract Ratable Determine Contract Recognize Full For Revenue Contract

Source: Accenture, December 2014

Figure 4. Revenue Recognition Process Framework

How much revenue can be recognized? When can revenue be recognized?

Event-driven Determine Usage-based Identify Contract Price Allocate Milestone Contract Price Identify Ratable Obligations Proportional performance

Source: Accenture, December 2014

8 The complexity of the response is driven by a number of process enablers. They are:

1. Cross-functional revenue contract governance 2. Standardized revenue contracts or revenue contractual terms 3. Standardized product offerings 4. Analytics for variable consideration management 5. Analytics for fair value derivation 6. Revenue recognition automation 7. Disclosure reporting automation

9 1. Provide cross-functional In situations where contract standardization Other considerations involve bundles. A revenue contract governance: is not feasible, standardization of contractual bundle is defined as a group of offerings sold clauses may be possible. Some companies flag to a customer as one offering for customer Complexity in revenue accounting is often non-standard clauses with revenue recognition ordering expediency. It is suggested that directly related to complexity in contracts implications for escalation and approval. This bundles not be set-up as a separate product, with customers. Companies can manage this practice can help streamline the revenue except in limited situations when two items complexity through a contract governance accounting process and focus attention on are almost always sold together and the program, with global and cross-functional high dollar deals; however, we suggest care revenue recognition methodology is the representation. Leadership of the governance and attention be focused on contractual same for both. Separate stock keeping units program by a cross-functional Steering clauses that could delay revenue recognition. (SKUs) help support other processes, such as Committee is suggested with overall performance reporting and accounting. responsibility for contract policies and To align with the approval authorities. This cross-functional Standards Board (FASB) and the International 4. Manage variable consideration: Accounting Standards Board’s (IASB) process, Steering Committee would have representation Variable consideration is dependent on from finance (e.g., accounting, tax, and we suggest that contract lines (or sales order lines) represent one product, service, license or some future unknown event and is seen treasury), information technology, human in many forms, such as refund rights, resources, sales, legal, and supply chain. other sales item. Where feasible, providing this specificity to contractual terms may simplify bonuses, penalties, value deals and usage- A strong governance routine can help and streamline the revenue accounting based contracts. For example, the price of garner executive and board support processes in two areas. First, by having a a cloud-based offering may be dependent early on and avoid unnecessary revenue contract line represent one performance on usage and usage is unknown at time complexities and unforeseen consequences obligation, additional accounting steps may of contracting. It is also commonly seen resulting from non-standard contractual not be required to separate or combine in milestone projects, including building terms and conditions. Strong contract contractual terms to identify performance construction, aerospace and defense projects, governance helps guard against unnecessary obligations. Second, the new guidelines and software development, where bonuses proliferation of non-standard contracts distinguish between the customer contract are paid for achieving certain milestones. and provides efficiencies in the contracting and a contract for accounting purposes, The guidelines require that variable process by minimizing and streamlining requiring companies to combine or bifurcate consideration be included in the overall approvals for non-standard terms. customer contracts for revenue accounting contract price when a company can predict 3 purposes. This process step may be minimized with 70% to 80% accuracy its outcome. Work flow technologies, integrated with or eliminated through contracting processes. sales opportunity management systems, can Furthermore, a company is to reassess support contract drafting, electronic storage 3. Standardize product offerings: this probability each period and adjust the 3 of contracts, and automatic routing of revenue accounting processes accordingly. contracts for approvals. The technology can Another leading practice is to standardize product offerings. These offerings refer to any Companies may require accounting policies also facilitate and control contract approvals. to define probability metrics by type of Electronic document storage systems can product, service, license or sales item offered to a customer in the normal course of business. variable consideration. These policies can drive provide for a repository of legal documents consistency and efficiencies in the number of for global access and version control. One key requirement of the FASB / IASB guidance is to determine the fair value of all predictive models required for compliance. 2. Standardize contractual terms: offerings; this may require a company to track Data analytics tools, project systems and the selling price of offerings sold “in similar workflow tools are examples of technologies Optimizing the use of standardized circumstances and to similar customers.”3 that may enable this process step, depending contracts is suggested as a leading practice. Standardization enables the streamlining on the type of prediction required, such as: Consistency in accounting treatment of the fair value process. For example, if can be improved and the volume of products are defined in different systems, • SaaS usage contracts to review is often minimized. then additional processes may be required • Milestone delivery achievement In short, standardized contracts help to analyze product sales data for fair value promote process efficiency. This process derivation. If the historical population cannot • Rebate estimates often works in situations where sales are be combined, then additional steps will be standard and of high transaction volume. required to help derive fair value for offerings. 10 5. Derive fair value using analytics: 6. Automate revenue recognition: 7. Accelerate disclosure preparation with automated reporting: The FASB / IASB accounting guidance A company recognizes revenue when it requires companies to reallocate the contract is deemed that all rights to a product or Comprehensive disclosures, both qualitative price to the offerings in the contract based service have been passed to a customer. and quantitative, are prescribed by the on their relative fair value.3 Figure 5 depicts To apply this principle, several revenue Boards and may impact a company’s this very simple mathematical task. recognition methods are seen in practice reporting systems and financial close and each has its own process and processes. Among these disclosures are: This requirement exists in US GAAP today technology considerations. Figure 6 discusses and multiple approaches are seen in common revenue recognition methods. • Disaggregation of revenue, with practice to comply with this regulation. In revenue reported by ‘category’ and by our experience, analytics tools are used by In our view, a leading process solution is ‘reportable segment.’ When selecting many companies to derive fair value price to automatically support each revenue categories, companies are to consider ranges. This method performs basic statistical recognition method and to decouple revenue economic factors that impact uncertainty analysis (mean, mode, range, etc.) of a recognition from invoicing. To clarify, of revenue and cash flows. pool of historical transactions. Accounting revenue is recognized when earned, and an policy typically determines the timeframe is recorded at invoicing. • Contract balances, including opening and for updating fair value prices, transaction These times may be different, giving rise closing balances of accounts receivable, history to consider and procedures for fair to different treatment. contract and contract liabilities. value derivation. One company, for example, Invoicing before revenue recognition gives • Performance obligations, including defines fair value price ranges based on rise to a liability ‘deferred revenue’ and both qualitative and quantitative standard deviations from the mean. In our invoicing after recognition gives rise to information, and the requirement to view, this is a recommended approach as it is an ‘earned but unbilled revenue.’ report on performance obligations scalable and offers additional opportunities that are unsatisfied at period end.3 to use this data for other predictive models. A leading practice solution is to automate the revenue recognition method and to A leading practice solution is to automate However, not all companies have high automatically manage the deferred revenue the reporting of quantitative disclosures. Of volume transactions where pricing is and earned but unbilled revenue balance note, accounting policies will be required relatively variable. In such cases, the use of sheet accounts. In our experience, many to define the reporting content (e.g., a fixed split approach may be appropriate. companies manage deferred revenue and disaggregation categories). An initiative may This approach typically uses tables, where unearned but unbilled revenue manually. be required to design and implement the the percentage split of revenue among As with any manual process, this is more reporting, which may be straight-forward the elements in a contract is pre-defined error prone and thus more risky. Also, a or complex depending on data availability. and consistently applied. This approach manual process in this area can become is recommended where prices are less unmanageable as transaction volumes grow. The volume and complexity of the revenue dynamic, and discounts off list prices may disclosures may impact the finance close be analyzed to determine fair value prices. process. A leading practice solution is to access these impacts and update the close processes accordingly. The organizational place of these activities may be centralized or distributed; several factors drive this placement of which close timeliness and accuracy are key.

11 Figure 5. Revenue Allocation - Example Methods • Statistical analysis enabled by analytics • Fixed split approach

Allocate Revenue Performance Obligation Contract Price Offering Fair Value Reallocation Revenue Recognition Amount

Equipment $1,000,000 $1,500,000 (1500 / 2300) X 1700 $1,109,000

Maintenance Service 300,000 300,000 (300 / 2300) X 1700 222,000

Software 400,000 500,000 (500 / 2300) X 1700 369,000

Total Contract $1,700,000 $1,700,000

Total Fair Value $2,300,000

Source: Accenture, December 2014

Figure 6. Revenue Recognition and Technology Enablement

Revenue Recognition Methods - Process and Technology Considerations Method Description Process / Technology Considerations Representative Industry

Event-driven Revenue is earned when a particular • Operational systems track events, such as • All industries event occurs, such as delivery, shipment, eDelivery, service completion, and acceptance acceptance, and installation • Ideally, event triggers invoicing and revenue recognition at the same time

Ratable Revenue is earned over time, • Ratable arrangements are • Communications, typically on straight-line basis typically supported by ERP Media and High Tech • Subscription sub-systems may be required • Financial Services to track subscription offerings

Milestone Revenue is earned when milestones are achieved • Project systems track milestone achievements • Communications, and post revenue to general ledger Media and High Tech • Milestone billing methods may provide • Aerospace and Defense required technology support • Products • Life Science

Usage-based Revenue is earned based on consumption, such • Operational systems track actual usage, • Communications, as transactions supported by cloud offering required for revenue recognition Media and High Tech

Proportional Revenue is earned based on percentage • Project systems may be required • Aerospace and Defense Performance of capability delivered to a client to track performance

Source: Accenture analysis, December 2014

12 Technological Enablement of the Revenue Function

Technology enablement of the revenue In short, out-of-the-box, end-to-end • Custom applications – applications function may be managed in many different revenue technology solutions are rare specifically developed in house or by a ways depending on company size, transaction in practice for revenue recognition and third party to address specific business volumes, products and customer contracts. companies typically adopt one or more requirements. Custom technology can Existing technical infrastructure may also of the following types of solutions: support the entire end-to-end process play a role in how companies choose to or supplement existing systems for automate the revenue function. For instance, • ERP solutions – major ERP vendors specific functionality requirements. a company with a significant ERP footprint (such as SAP SE and Oracle Corporation) may gravitate towards finding a revenue offer revenue accounting modules accounting solution in the same application designed to help companies manage family and only consider bolt-on and / or their revenue accounting requirements custom solutions for specific functionality as part of their overall ERP suite. gaps. Other companies may find that only • Bolt-on applications – vendor solutions significant customization will address their specifically designed for revenue technology needs for revenue accounting. accounting help companies manage revenue accounting requirements and interface with ERP systems.

13 ERP Solutions SAP has recently completed a multi-year Oracle supports the adoption of the new effort to develop a new standard SAP® revenue standard with Fusion Revenue ERP vendors, such as SAP and Oracle, solution, “SAP Revenue Accounting and Management. This provides a centralized have or are providing new solutions Reporting 1.0.” 4 This solution is targeted and automated revenue management to address the Boards’ new revenue to manage all major processes of revenue solution that allows companies to accurately recognition required by FASB and the recognize revenue from contracts with accounting guidance. We continually IASB. The new solution is now in ramp up. customers using multiple methods for evaluate these capabilities and work Customers with current SAP® software ERP revenue recognition, e.g. at a point in with these vendors in understanding Financials maintenance agreements are time or over time, and separately from their respective product offerings. expected to have access to this solution, the billing process. Oracle Revenue scheduled for release in Q1 2015.5 Management helps organizations meet the new accounting standards requirements SAP® Revenue Accounting Capabilities This solution decouples operational sales and simplifies the accounting process and accounting processes and supports SAP’s revenue recognition capabilities for revenue recognition. Among other multiple revenue recognition methods. have continued to evolve. SAP currently capabilities, the solution uses business Figure 7 provides a high-level view of the has a certain level of maturity with the rules to efficiently identify and examine solution. Of note, this capability supports current revenue recognition rules which contracts, calculate and allocate revenue the accounting for multiple element support many key revenue processes. At a based on prescribed inputs, and accurately arrangements by leveraging the flexible rules high level, key capabilities of the current recognize revenue for each deliverable. framework. In addition, the solution also revenue recognition solution include: provides for revenue accounting analytics The solution co-exists with Oracle’s • Revenue can be recorded at the time of and assists with management reporting. E-Business Suite (EBS) by using the source systems’ revenue events and billing, between specific sets of dates Oracle Revenue in equal proportions, and on the basis reference data. The solution provides a Accounting Capabilities of specific events (e.g. delivery). centralized data repository and manages revenue with capabilities that include Accenture’s Oracle clients have traditionally • Revenue can be recorded on the basis of automatic identification of contracts been using the capabilities of Oracle® the criteria which have been established with multiple element arrangements, E-Business Suite or other Oracle® solutions for the contract or order item; it can be calculation and management of fair with extended capabilities through custom recognized before, during and after billing. market value (FMV), and revenue allocation solutions or bolt-on applications to manage adjustments to comply with FMV. • Real time updates of revenue information their revenue operations. With the evolving to the general ledger (GL) and accounts revenue standards, Oracle has been working Customers who already utilize EBS have a receivable (AR) sub-ledger. closely with customers to architect an clear migration path to the new revenue adaptive and comprehensive solution named standards. The solution integrates with EBS SAP’s current capabilities work well for Oracle Fusion Revenue Management (part using out-of-the box integration capabilities companies that do not have complex multiple of Oracle Fusion Financials). This provides to extract and import source document element arrangements where the contract a new capability to clients, preparing lines to perform revenue recognition and price is to be allocated based on the relative them for the new revenue standards. revenue compliance activities. As illustrated fair value of the elements in the contract. in Figure 8, some of the EBS applications covered by the integration include order management, service contracts, project billing, costing and accounts receivable.

14 Figure 7. SAP Revenue Accounting and Reporting Overview

Operational Systems Finance

Revenue Accounting Sales and Distribution Flexible Rules Framework Revenue Accounting (RA) aaDt Data Data Data

CRM Account Performance assignments Order Confirmations Proof of Obligation A / Invoice / Delivery delivery RA

Contract Data Consume to Cash Performance Contract Obligation B assignments Others such as 3rd party

Finance - General Ledger (FI-GL) Controlling - Profitability Analysis (CO-PA) Source: SAP SE

Figure 8. Oracle Revenue Recognition

Revenue Events via Delivered Source Views

EBS Order Management EBS Service Contracts EBS Projects EBS Accounts Receivable 3rd Party

Revenue Data Repository

Manage Compliance Create Schedules Create Accounting and Analyze

• Support for multiple • Separate revenue from billing • Generate revenue and • Seeded revenue reports for element arrangements deferred revenue entries compliance reviews and audit • Create ratable, immediate • Calculate and manage and deferred revenue schedules • Automatically create • Ad hoc reporting layer fair market value compliance adjustment entries

Customer Acceptance Payment Revenue Accounting

EBS Order Management EBS Accounts Receivable EBS Costing General Ledger

Source: Oracle Release Announcement, Fusion Revenue Management

15 Bolt-on Applications Custom Applications

There are several bolt-on software options Custom applications are developed in-house available to facilitate revenue recognition or by third party vendors to create tailored processes and support downstream solutions that address a company’s specific accounting functions in ERP systems. requirements. Companies with high volume, Typically, bolt-on applications extract data high variability in their customer contracts from source systems, execute and manage are the most common candidates for this the revenue accounting processes, and pass approach. Typically very costly, custom information to downstream systems such applications are uncommon in practice. as the general ledger. Figure 9 identifies some possible bolt-on applications.

Figure 9. Bolt-on Software Considerations

Bolt-on Software Options • RevProTM by Leeyo Software Inc. • RevStream Enterprise Revenue Lifecycle Management by RevStream Inc. • Workday Revenue Management by Workday, Inc. • Revenue Recognition Management by NetSuite Inc. • Z-Billing by Zuora Inc.

Source: Accenture, December 2014

16 Organizational Impacts

In addition to process and technology, • No duplication of work and few, if any, organizational effectiveness is a key process redundancies within the ingredient in establishing an overall revenue process. revenue accounting process able to • Explicit ownership and governance of the deal with the increased complexities function through Global Process Owners. brought on by this specific guidance. • Strong culture of functional leadership In a broader context, it is also and clear communications not only within instrumental in providing strong finance but also to the broader, cross- leadership for the end-to-end revenue functional stakeholder community. process across the entire company. Talent Management / Training

Through its work with a wide The continual assessment of staff in highly skill-based revenue functions, especially variety of clients, Accenture finds where regulatory requirements change that organizational excellence in significantly, can result in the need for new finance functions in general, and or different skill-sets. Decisions are typically revenue accounting in particular, required around the acquisition of right- center around three key items. skilled talent versus training and up-skilling of existing talent. In addition, structured training regimens and curricula must be in Functional Stewardship place to confirm staff is continually aware of Creating an end-to-end “Revenue Operations” changes in regulations and can react to these team responsible for executing all finance- changes in a timely manner. Progressive CFOs related revenue process work under a single increasingly choose to deliver talent training global team is encouraged. This typically through structured and targeted “Finance facilitates revenue recognition, revenue Academies” – tailored programs developed to forecasting alignment and communication specific finance requirements and aimed at while also providing clear ownership of the developing and supplementing existing skills. entire end-to-end function throughout the Roles and Responsibilities company. It also provides an appropriate level of control over revenue oversight. Many The clear definition of roles and high-performance finance organizations responsibilities for the entire revenue also extend the notion of “single team for management cycle across all functions a global process” and incorporate shared involved is also encouraged. This promotes services and outsourcing arrangements a clear understanding of hand-offs between to further optimize the revenue function. functions at process integration points. Tangible benefits of strong functional stewardship typically include:

17 Supporting Strategic For revenue accounting, the Technical Steve Rivera is the Global Head of Technical Compliance and Accounting function Compliance and Accounting at Johnson & Decisions—A Leading Practice opines on non-standard contracts in excess Johnson. He points out that “the challenge Finance Organization of a certain dollar threshold, as well as over the next five years will be to develop contracts involving strategic intellectual practice guidelines to interpret the new Johnson & Johnson is one example of a property. This accounting team reaches revenue standard. There are no bright lines leading practice finance organization, beyond the traditional finance function as we often see with the current US GAAP where core global finance processes and serves as a strategic partner with the rules as this new standard is principle are determined centrally, given global business. In addition, this team provides based.” Steve’s leadership and contribution authority and provide core expertise. policies to guide the accounting for routine extend beyond company borders. His Johnson & Johnson has realized benefits revenue contracts and transactions of external involvement as the Chairman of from this approach including: lesser value and training to the extended the Accounting and Reporting Committee financial community to support the day- for Pharma and Device companies and • Increased service and responsiveness to-day accounting decision-making. Post-Implementation Sub-Committee for when evaluating large and License Revenue for the Financial Executives complex strategic deals. High-performance finance organizations International Committee on Corporate require core capabilities to drive efficiencies Reporting will shape some of the key • Integration timeline and activities across the value chain. Two finance decisions and judgment calls companies compressed in support of M&A activities. organizational approaches are seen in will consider for accounting and reporting practice. With the first, certain core global • Single points of contact and accountability revenue under the new standard. Through his finance functions are housed centrally and to the CFO organization for compliance efforts to lead these collaborative industry are aligned directly to the CFO and support and technical accounting. committees and connecting on a regular the entire organization, such as that found at basis with the major accounting firms and • Highly specialized team with deep Johnson & Johnson. This approach works well standard setters, practice guidelines can accounting skills to provide training in situations that require deep specialized be developed to ensure consistent and across the finance function and the skills and the ability to connect with peer compliant accounting and reporting. major segments of the enterprise. industry companies, to provide critical input into strategic decisions, and where face-to- • Collaborate with external industry face interaction is required at the corporate peer companies regularly. level. With the second, regional finance organizations are established to support varied financial requirements within the region. Regional centers are typically seen when face-to-face interaction on a daily basis is required with regional leadership.

18 The Journey to 2017

In our preceding discussion, we illustrated assessment that provides a clear enterprise Figure 10 below illustrates a typical approach some of the hallmarks of a high-performance vision, strategy and implementation to a comprehensive assessment of revenue revenue accounting process supported roadmap. An effective assessment should accounting processes for the purpose of by a viable technological infrastructure answer the following questions: not only identifying regulatory impacts but and executed by a team of well-skilled also efficiently assessing the entire end- and organized professionals. In order to • Do processes need to be redesigned to-end revenue accounting function for get to that level of functional excellence, and if so, how? broader transformation opportunities. CFOs should refrain from just addressing • Do finance and other functional mandated compliance requirements but activities and resources need to be instead adopt a broader transformational reorganized / realigned and if so, how? mindset to address compliance, help achieve end-to-end revenue function excellence • What are the training needs? and leverage the opportunity at hand to identify and capitalize on additional value- • How will stakeholders be managed generating opportunities. To that end, and communicated with? we believe all successful transformation programs start with an effective • Do systems need to be redesigned and if so, how?

Figure 10. Assessment Phase Approach - Illustrative

Activity Week 1Week 2Week 3Week 4Week 5Week 6Week 7Week 8Week 9Week 10 Week 11 Week 12

Mobilization / Kick-o Assessment Approach and Work Plan

Accounting Firm Technical Accounting Recommended Revenue Accounting Changes Technology Impact Assessment Technology Assessment Iterative Review Process Assessment Business Process Assessment Accenture Organizational Assessment Organizational Assessment

Deployment Strategy Deployment Strategy Deliverable

Checkpoint/Steering “In-flight” Non-revenue Accounting Related Projects and Corporate Initiatives Committee Meetings

Source: Accenture, December 2014

19 In our view, an effective assessment Process Impact Assessment A thorough and structured assessment initiative depends first and foremost effort with full participation from all • Identify all processes affected by changes on cross-functional involvement affected business functions – such as in revenue recognition policies – this finance, information technology, human of all affected business functions, will likely extend to a number of process resources, sales, legal, and supply chain - the internal technical accounting areas including contract management, can enable stakeholders to understand and team, the and the supply chain activities and order to cash. endorse the scope of the change impacts. As well, the functional and technical external professional services to • Develop process improvement requirements to accommodate the change manage the overall program effort. opportunities leveraging leading in the guidance are documented and revenue accounting practices. can form the basis for the planning and We would expect to see the • Assess impacts on controls. design activities in the implementation following work take place as phase. Finally, at this point, there should part of the assessment effort: Organizational Impact Assessment be clarity around the time required to implement these changes and a viable • Identify key stakeholders – both implementation plan should be in place. Technical Accounting Assessment internal and external.

• Identify and assess key revenue recognition • Assess training, communications and differences arising from the new guidance. workforce transition requirements.

• Confirm appropriate financial disclosures • Assess organizational readiness. required to meet regulatory requirements. Deployment Strategy Development Technology Impact Assessment • Lay out potential deployment options • Assess impact on current revenue systems. for implementation and select optimal deployment strategy. • Evaluate new data / analytics requirements to support estimates and judgment (i.e., • Plan deployment with other “in flight” fair value for performance obligations). corporate projects and initiatives in mind to provide appropriate focus on this initiative. • Compile new reports to support disclosures mandated by the new guidance. Iterative Reviews

• Identify potential / • Executed through agile and recurrent general ledger / sub-system requirements. workshops with the cross-functional team in periodic cycles until a fully integrated solution has been reached.

20 The favorable completion of a process owner for revenue accounting Based on the outcomes of the assessment comprehensive and validated processes. This can be an effective way effort, the company can then embark on assessment initiative is strongly to maintain momentum and visibility. the implementation of required changes to process, technology and organization. The dependent on the following key factors: • Consider all end-to-end revenue impacts time-frame for assessing change impacts and and be guided by leading practice designing and deploying a compliant solution • Assemble a cross-functional team to help process and capability principles. can be highly variable, but can certainly be a multi-year initiative based on the complexity safeguard that all impacts are identified • Move with speed, i.e., do not be misled of the company’s process and technology and all relevant business functions by the effective date of the guidance landscape. Figure 11 illustrates the high-level have a stake in the assessment. as impacts for some companies may steps in the journey to compliance. While the be significant and far-reaching, and • Develop a strong project governance time-frames depicted are merely illustrative the time horizon for implementing routine – garnering executive and they are reflective of the time and effort meaningful change may be significant. board support early on, creating a involved in major transformative efforts. cross-functional steering committee • Collaborate with technical accounting including finance, information and external auditors. technology, legal, audit, sales and supply chain, and identifying a global

Figure 11. Implementation Timeline - Illustrative

Change Impact Solution Planning Solution Build Solution Assessment and Roadmap and Design and Test Deployment

8-10 Weeks 6-9 Months 10-12 Months 3-6 Months

• Collect and evaluate relevant data • Develop a revenue recognition • Build technical infrastructure • Make go / no-go decision • Assess revenue recognition adoption strategy and (including performance testing) • Conduct rigorous user training deployment plan policy change impacts on: • Configure applications; build • Deploy: • Current systems and data • Identify functional and development objects required for technical requirements post convergence functionality • Accounting and sub-systems • Affected business processes per deployment strategy • Design future state processes • Define new roles and responsibilities • Organization and and internal controls based on future state processes • Internal controls organizational readiness affected by convergence • Build financial and management reports • Business processes to locations • Financial and management • Design future state • New organizational structure reporting • Test all configurations, technical architecture development objects and reports • Conduct post go-live support • Identify value-add opportunities • Design post-convergence organization • Conduct internal controls through close cycles ensuring • Understand key stakeholder needs • Design and model data models and compliance testing compliance to convergence and secure leadership support rules and internal controls and data governance processes • Develop training plan and materials • Develop future, compliant vision • Develop comprehensive change • Develop business case and and communication plan roadmap for change

Program and Journey / Change / Communication Management

Source: Accenture, December 2014

21 Conclusion

The new revenue recognition guidelines set out by FASB and IASB demand a proactive and comprehensive examination of a company’s end-to-end revenue function and a significant commitment in terms of funds and resources for a potential multi- year effort to assess and implement the required modifications to policies, processes, systems and organizational alignment.

By any measure, regulatory compliance is a powerful incentive to commit significant financial and non-financial resources to remain in step with rules and regulations. While compliance is a laudable and valid goal in itself, it does not typically provide tangible transformational business and strategic value. It does however provide a viable entry-point to affecting truly transformational change, and progressive CFOs will seize the opportunity to leverage the resource commitments of a compliance initiative to investigate, identify and realize tremendous value-generating opportunities for the business and thus truly position the finance function as a strategic partner to the business.

22 Notes Beverly Welch About Accenture Senior Principal - Communications, Media 1. FASB in Focus, Accounting Standards Accenture is a global management and Technology practice. Beverly has over Update No. 2014-09, Revenue from consulting, technology services and 25 years of experience in finance. She has Contracts with Customers (Topic 606), outsourcing company, with 305,000 people held senior roles in industry as a technical FASB, May 28, 2014. Access at: serving clients in more than 120 countries. , in academe as a professor, in http://www.fasb.org/cs/ContentServer?c=Do Combining unparalleled experience, standard setting as a researcher for the cument_C&pagename=FASB%2FDocument comprehensive capabilities across all Financial Accounting Standards Board and in _C%2FDocumentPage&cid=1176164075187 industries and business functions, and management consulting. Beverly specializes extensive research on the world’s most 2. FASB, IASB Unveil Final Standard on in finance process transformations, where successful companies, Accenture collaborates Revenue Recognition, Jason Bramwell, she helps technology companies improve with clients to help them become high- AccountingWeb, May 28, 2014. their revenue and record-to-report processes. performance businesses and governments. The Access at: http://www.accountingweb. She is a Certified Public Accountant (CPA) in company generated net of US$30.0 com/article/fasb-iasb-unveil-final- North Carolina and New York and a Chartered billion for the ended Aug. 31, standard-revenue-recognition/223413 Global Management Accountant (CGMA). 2014. Its home page is www.accenture.com. 3. Financial Accounting Standards Board, Chris Kaemmerer Disclaimer Accounting Standards Update, No 2014- Senior Manager - Retail. Based in Toronto, 09, May 2014, Revenue from Contracts Chris has over 20 years of consulting and This report has been prepared by and is with Customers (FASB Codification industry experience managing a wide distributed by Accenture. This document Topic 606, Sections 606-10-05-4, 606- range of complex finance transformation is for information purposes. No part of 10-25-9). Access at: https://asc.fasb. projects for global resources, products, and this document may be reproduced in any org/imageRoot/00/51801400.pdf telecommunications companies. Specializing manner without the written permission of in financial business process improvement, Accenture. While we take precautions to 4. The New Revenue Recognition Standard finance operations, finance strategy, and ensure that the source and the information is here, now what? CFO Knowledge, we base our judgments on is reliable, we Pete Graham Blog, September 18, 2014. enterprise performance management, Chris do not represent that this information is Access at: http://cfoknowledge.wordpress. is focused on helping clients establish accurate or complete and it should not be com/2014/09/18/the-new-revenue- a high-performance finance function recognition-standard-is-here-now-what/ and working strategically with them to relied upon as such. It is provided with the support superior enterprise results. understanding that Accenture is not acting 5. SAP Revenue Accounting and in a fiduciary capacity. Opinions expressed Reporting, Release 1.0, Ramp- Ravinder K. Gupta herein are subject to change without notice. up SAP Revenue Accounting and Business & Systems Integration Manager Reporting, SAP Service Marketplace - Accenture Technology, Enterprise SAP is the registered trademark of SAP SE Resource Planning (ERP) practice. Based in in Germany and in several other countries. Authors Minneapolis, Ravinder has over 14 years of Stay Connected experience across a wide range of complex Les Stone SAP® software ERP implementations Join Us Managing Director - Retail, CFO & Enterprise for global resources, products and retail https://www.facebook.com/ Value. Based in New York, Les is a Certified clients. A Solution Architect, specializing accenturestrategy Public Accountant specializing in financial in advisory for ERP assessments, and business process improvement, finance and leading practice assessments for finance Follow Us accounting operations, shared services, and business processes implementations in SAP® http://twitter.com/accenture finance operations strategy. He has held software ERP, Ravinder is also a Certified senior finance roles with a Fortune 150 firm Information Systems Auditor (ISACA, and has over 40 years of practice experience. Illinois), a (ICAI, Watch Us With his extensive skills in the areas of India) and a Certified SAP® Professional. www.youtube.com/accenture strategic planning, transportation and logistics, information technology, and deep Connect With Us experience in manufacturing, distribution https://www.linkedin.com/ and retailing, Les guides global companies company/accenture-strategy on their journey to high performance.

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