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New Revenue Recognition Rules Are Turning Contracts into Critical Business Assets

A recent survey from EY revealed that many companies are facing difficulties with their ASC 606/IFRS 15 compliance programs. According to the report, 71% of CFOs say their revenue recognition programs are not yet complete and 45% are having difficulties implementing or upgrading to a new system and may miss the adoption deadline. The root of many of these challenges lies in how they approach contract management.

Contracts are the single source of truth for every business, full stop. But in many companies, contracts are organized into multiple silos:

  • Buy Side
  • Sell Side
  • Corporate, etc.

However, compliance is not siloed and as we see from ASC 606/IFRS 15, neither is revenue recognition tied just to sell-side contracts.

Effective Contract Management Software Critical for Compliance

The new revenue standards will challenge companies to inventory all their sell-side contracts to identify sources of fixed and variable consideration, and to inventory certain buy-side contracts to properly allocate direct costs. This is a heavy lift and the EY survey suggests companies are doing this manually and are challenged by legacy contract management software. For example, more than 50% of respondents cite the burden of legacy IT and systems complexity as a barrier to unlocking broader business benefits from accounting change. Surveys from PwC and others have found similar results.

So, the question is, if a company is going to touch every contract to address ASC 606/IFRS 15, why not capture all the contract data in a system that can be leveraged for any new changes in accounting standards or regulations that will undoubtedly be coming over the next decade? Leading companies in every industry are already doing this.

Driving Velocity and Compliance with Contract Lifecycle Management

An enterprise-wide contract lifecycle management (CLM) system can manage the entire life cycle of a contract, from creating templates to managing work flows for contract negotiation and approval, to post-execution contract compliance via obligations management. With an enterprise-wide CLM system, companies can leverage the metadata embedded in each contract to react quickly and confidently to changing revenue recognition rules under ASC 606/IFRS 15.

The benefits extend far beyond optimizing the costs of compliance, though. Traditionally, companies have seen compliance and business velocity as opposing forces. Getting a deal done fast may require a company to sacrifice some aspects of control/compliance ("just get the deal done"), or at the very least alter the standard work flows put in place by management.

With a CLM system, a company can create templates and contract workflows to enable employees to maximize velocity, while allowing for proper escalations when contract compliance guardrails are crossed. As a result, leading companies are increasing both velocity AND compliance. This is truly a transformational outcome.

Ensuring A Successful Long-Term Outcome

Companies contemplating a move to an enterprise-wide CLM, especially those facing the upcoming revenue recognition compliance deadlines and contract compliance issues, will need to find systems that meet both short- and long-term needs. As companies look for solutions that will help them meet the new standards, they need to keep in mind two important criteria that will contribute to long-term success:

  • Flexibility
  • Ease of use

Flexibility is paramount with growing enterprise customers. Products change, teams reorganize, employees come and go and new acquisitions need to be integrated. A best of breed CLM system allows companies maximum flexibility to address the constant change inherent in business today. Home-grown solutions are typically built to specific requirements, and these systems are out of date almost as soon as they are released.

Ease of use is also critical to a successful project. History is littered with IT projects that were never fully adopted because users found them too difficult to integrate into their day-to-day work flow. Finding systems that lower the "tax" on users by permitting personalization, allowing mobile access and integrating with existing applications is a pre-requisite in adopting a CLM system to address ASC 606/IFRS 15, or addressing any other accounting or regulatory change.

Escaping the "Rinse, Repeat" Cycle

ASC 606/IFRS 15 will represent a watershed moment. Forward thinking companies will take this as an opportunity to solve a much larger problem than the one presented by ASC 606/IFRS 15. Those companies that adopt an enterprise-wide CLM and make contracts the foundation of their commercial systems will break out of the cycle of addressing every regulatory change by throwing bodies at it. In addition to preparing themselves for future regulatory changes, they will also enable their company to increase business velocity, improve competitiveness in the global economy while ensuring contract compliance.

A version of this article was originally published in Bloomberg BNA.

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