One of the changes affecting private businesses in 2019 is ASC 606, Revenue Recognition.
Danielle Moga provided the insights below about what ASC really means to you. She is an associate of Barker Associates with a wide variety of accounting and finance experience with non-profit and public companies.
ASC 606 What it Means to Private Business
Contributed by Danielle Moga
Public companies had to adopt the standard in 2018 and what we’ve learned is that the process to implement was not a straightforward exercise. Many companies underestimated the complexity of the change and did not have the appropriate time, resources or processes in place to implement seamlessly.
The new standard changes the way companies need to record and recognize revenue from their contracts. The goal of the new standard is to enable users to understand better and consistently analyze revenues across industries, transactions, and geographies but the disclosure requirements are comprehensive, and the changes to the nature and timing of revenue recognition can be significant.
The good news is that you don’t have to be an industry-specific guru to implement the changes, as FASB opted for a more principles-based approach. The challenge is, those preparing financial statements and disclosures will require more judgement.
ASC 606 breaks down the analysis of contracts into a 5-step process that is intended to help preparers wrangle the chaos of details but the task to determine revenue recognition can be daunting depending on the volume and types of contracts that exist.
- Identify the contract(s) with a customer
The contract must be fully executed, clearly identify the good/services to be transferred and specifically outline the payment terms.
- Determine the performance obligations in the contract
All distinct transfers of goods or services must be identified. A good or service is distinct if 1) the customer can benefit from it on their own, or with resources they already have, and 2) can be transferred independent of other performance obligations.
- Determine the transaction price
The amount of consideration the company expects to be entitled to in exchange for transferring the promised good or service.
- Allocate the transaction price to the performance obligations in the contract
Performance obligations in the contract need to be separately identified priced or estimated.
- Recognize revenue when (or as) the entity satisfies a performance obligation
The timing of recognition of revenue is dependent upon the time frame in which satisfaction of the obligation occurs. Point in time vs. variable over time.
The five steps are handy but don’t realistically help to manage the complexity of the project or the time it will take to meet the looming deadline.
We recommend a 3-phase approach:
- Analyze contracts and systems
- Ensure you have the right resources on hand with the skills and time necessary to lead and organize the project; or hire those resources externally for support.
- Outline all components of the contract(s), as denoted in the 5-step process.
- Decide if the retrospective or cumulative method will be utilized.
- Document the existing methods and systems used to report revenue streams.
- Determine the necessary changes to process and systems to implement and control the new recognition methods.
- Document judgements made where clarity is needed.
- Outline historical journal entries and the new ones necessary for compliance.
- Determine differences and the impact on revenue, KPI’s and other material items.
- Begin the conversion process and maintain parallel systems to ensure accuracy.
- Schedule internal assessments of reporting and systems to ensure ongoing compliance.
- Assess the skills and time of the internal team designated to safeguard this process to establish if additional support is needed.
Even with steps and a process, companies must set aside the time necessary to transition. Companies with minimal impact may only need a few months to go through the process of outlining and documenting. Companies with complex revenue streams and required system changes could take six months or more to transition and implement.
Don’t get caught in the 11th hour, start now! If your internal team is seasoned enough to handle this change then there are many resources available to educate and plan. Alternatively, leverage outside talent to minimize the chaos and challenges that come with significant change.
Placing paper checks in the mail to vendors places your company at risk if you are placing them in the mail without Positive Pay.
Why don’t you just play Russian roulette with a full chamber or ride a motorcycle without a helmet? That may seem a little over the top, but the paper check is a risky way to submit payments to vendors.
What Can Happen?
A client contacted me recently to help unravel the mystery of the missing payment to one of his vendors. By researching his automated AP system and conferring with his third-party print vendor, we confirmed that the check had been produced and picked up by the post office for delivery. The check was eventually presented to a bank in Chicago for payment. The vendor was in North Carolina.
The bank in Chicago eventually released a photo to the FBI (yes, they had to get involved) of the person trying to cash the check. We had the chance to view the photo to confirm the person was not an employee of my client’s company. Thanks to using Positive Pay, they did not lose out on the amount of the check.
The incidents of check fraud are so frequent that law enforcement officials such as the FBI aren’t that interested in pursuing the “little guys;” they want to go after the big fish. Even though the check my client had cut was over $20,000 – big to him – it wasn’t worth pursuing just that instance to the FBI.
If you thought checks were old news, take a look at these statistics from the 2016 AFP Electronic Payments Fraud and Control Survey:
- Seventy-five percent of organizations that were victims of fraud attempts/attacks in 2016 experienced check fraud, a 4% increase over 2015.
- Positive pay continues to be the method most often used by organizations to guard against check fraud, used by 74 percent of organizations. Other methods include:
- Segregation of accounts (cited by 69 percent of respondents)
- Daily reconciliations and other internal processes (64 percent)
- Payee positive pay (41 percent)
- Lack of positive pay (cited by 23 percent of respondents) and clerical errors (18 percent) were two primary reasons for financial loss due to check fraud.
As the statistics show, checks continue to be the payment method most frequently targeted by those committing or attempting to commit fraud. One method companies use to fight check fraud is converting to electronic payments. In addition to the fraud prevention benefits, ePayments provide benefits such as:
- Ability to quickly process last-minute bill and payroll payments.
- Take advantage of early payment discounts, while paying closer to the due date.
- Improved client-vendor relationships due to rapid, more efficient payments.
- Eliminate the cost of printing and mailing paper checks, which can be as much as $9 per check.
Often implemented as an add-on to your existing financial system, the selection of vendors offering B2B ePayment solutions is huge. Barker Associates has seen the “deer-in-the-headlights” look that clients get when trying to sort through the options to choose the best solution for their company.
In addition, we have compiled an invaluable checklist that will guide you in the transformation of your payment process to select the best vendor for your circumstances.
I have had the opportunity to work with creative, tenacious entrepreneurs who add disruptive technology and new functionality to our world. I understand that as these wonderful people are creating, they do not always think about the best way to maintain the sales and customer infrastructure they need on the back end. A new court ruling could have implications for their business.
To help you all understand how the new sales tax laws could impact your business, I have deconstructed the new rulings to give you the bottom line on the fundamental requirements you must have in place to sleep peacefully, knowing you have the financial clarity to be prepared.
My experience working with the sale of a business, capital raise due diligence and audit prep gives me an understanding of complying with the new out-of-state sales tax requirements. I can see the look on your face when you ask your tax person, “What information do I need to understand my exposure to the new sales tax law, and they say, “It depends…”
Are Your Customers Out-of-State?
The recent ruling of the U.S. Supreme Court in the South Dakota v. Wayfair, Inc. case (June 21, 2018) has garnered lots of attention from business owners and finance professionals alike. The new law in South Dakota – if you sell a minimum of $100,000 in sales OR 200 transactions to South Dakota customers from anywhere in the US, you must collect and remit that sales tax based on South Dakota’s laws. There are thousands of technical tax issues and caveats that follow suit, with legislators expanding states’ legal ability to collect sales tax on sales executed anywhere in the United States; this should be more than enough to make you think it has got to be 5 o’clock somewhere.
Don’t be distracted trying to learn all the technical aspects of what is required; instead, work with tax professionals at a CPA firm or similar services. When you muster the courage to ask how to prepare for an impending sales tax audit, the person you are talking to is going to say – It depends.
Your tax person will ask many difficult questions, which you can’t answer to off the top of your head. I have worked with hundreds of companies going through audits at a national accounting firm, and I have been the CFO of both large and small entities. The wide range of systems and information about sales and customers that I have seen has been lackluster; in my estimate, a mere 15% of companies have the correct data on their customers organized in a way they would be able to answer questions when the tax professional says – It depends.
Be Ready for It Depends…
You can quickly feel overwhelmed just thinking about being subject to a sales tax audit for each state that you ship your product to. I’ve compiled the following list as a comprehensive guide to strength-testing your customer database, to see how it will hold up when this sales tax issue inevitably affects you.
1. Can you produce data that shows sales by customer that will reconcile with that year’s tax return submitted to the IRS? Or are you the type of business that does not consistently keep sales data that matches the corresponding financial data? Companies that are not subject to Sarbanes-Oxley, State regulatory filing requirements, or an annual audit do not keep sales data that matches their summary financial documents. In the case of the sale of the business, this becomes a due diligence issue, as the acquiring firm or investor cannot substantiate and analyze the sales to comfortably know what they are buying.
2. Can you dig into your customer data by state and by transaction? Can you determine the number of transactions by state? South Dakota’s new law states that if you have 200 transactions, you are subject to the collection and remittance of sales tax. There is NO dollar limit, or requirement on the 200 transactions. You could make 200 hair bows in your garage then send them to South Dakota, and you will still have to collect and remit sales tax.
3. Do your customer records consistently distinguish between billing and shipping addresses, and how easy is it to report? Is there a clear business rule and process that makes the shipping address distinct from the billing address?
4. If your business model is subscription services, but includes the sale of a product at the beginning of the relationship, can you segment the sale between product and service? For example, if you are a software-as-a-service, (SaaS), company and you sell hardware to run the service at the beginning of each sale, can you produce records that agree with the information in #1, to distinguish between product and service?
5. If your revenue is generated from maintenance and/or installation of items are you able to distinguish customer sales records between the sale of the product and the labor to install? The tax on labor for maintenance and/or labor in each State that charges Sales Tax is different, and you must be able to distinguish the difference between Labor and Parts in your operations, sales, and billing systems. Examples, where this applies, are large long-haul trucks, machinery, or pipelines used in construction, all of which include a sale followed by installation or maintenance.
Be Prepared with a Solid Infrastructure
Strategy discussions with your CPA must include an analysis of how to manage through these new regulations that are inevitably going to make their way through your state’s legislature. Politicians in states other than South Dakota are eager to push similar bills through their system, and it will be a popular but non-controversial pursuit. How exactly will each state implement such sales tax laws? My crystal ball says that only time will tell.
The bottom line is that, once again, I am giving another example of the cost of having the wrong infrastructure in your business. The costs related to sales tax compliance in this new world will be substantial. The good news is, with a solid data capture and reporting infrastructure, you can use the same data for analysis, reporting and audit preparation. Let’s work together to get you running your business with the financial clarity to know where you are headed!
Mindy Barker, CPA
I frequently see struggling businesses feel comfortable engaging a CPA to perform an audit, or use a bookkeeper to handle the financial processes of their company and provide monthly finance reports. As we delve deeper into the client’s concerns through probing questions, I often discover that neither the CEO nor the Board fully understands the monthly financial reports that were dutifully distributed to their emails.
Don’t mistake your CPA, who is preparing your tax return or an audit, as the financial strategist for your business. The CPA’s focus is compliance-driven, not future-focused. The tax return and audited financial statements are products that show the financial results at a specific point in time. It is unrealistic to expect your CPA to include ongoing consulting in their services.
To describe in sports terms, think of the CFO like the defensive coach on the field, helping to manage the organization’s financial moves, calling plays in the financial world.
The outside CPA is like the scorekeeper, up in the booth, keeping the score. It is unfair to blame them when you miss a goal or miss the opportunity to score a touchdown.
Consider adding a CFO to your leadership team to bring a financial, future-focused view to your organization’s decision-making process.
Barker Associates, CFO Strategists, works with entrepreneurial growth companies, established corporations and nonprofits to develop positive cash flow and increase the value of your company. We can be contacted at email@example.com or 904.728.2920.
Organizations both large and small can get frustrated with the timeliness and quality of the information they receive from financial systems. Often, snap decisions are made to purchase a new system to solve the problem. Many times old processes are transferred into the new system. The new system then doesn’t work the way it was envisioned, costing the organization time and money. All of this could have been avoided with proper planning.
As a Financial Strategist, I am often brought into organizations to review their systems and conduct due diligence for the purchase of a new one. In many instances, my evaluation has resulted in recommendations for improvements and enhancements for the existing system. By addressing process improvements, I have helped organizations avoid a new system purchase and provided immediate relief to pain points of information accessibility.
A bad process forced into a new system can result in potential disasters, such as delayed reporting and non-compliance. For example, I assisted an organization that was being fined for noncompliance in sales tax reporting. This company had recently implemented a new system, but the financial staff could not obtain accurate information for reporting because of incorrect data entry. Meanwhile, the fines and penalties for not reporting were adding up as the staff attempted to create the required information in an Excel spreadsheet.
Had this company conducted a thorough review of their current system and processes, even engaging the software vendor to learn if there was more they could be doing with their system, some of the delays and fines could have been avoided.
Mindy’s Tip: Review your current process or have a professional do it and make sure you actually need a new system before you make the decision to purchase. If you decide to purchase a new system, make sure you roll out the improved version with a strategic plan, so you do not interrupt the flow of your business.
Mindy Barker, Founder & CPA
(904) 394-2913 or (904) 728-2920
Instant rice and online banking have a lot in common. Instant rice is obviously quick, providing you with an immediate result. It works really well for casserole recipes or for certain dishes where rice and other ingredients are mixed together. But if you are serving dinner guests or in a fine restaurant, you expect the chef to put in the extra effort to serve gourmet rice prepared in an exotic way.
Don’t just rely on point-in-time views. Take time to reconcile accounts.
As with instant rice, online banking provides instant information regarding your bank balance, making it a great tool for certain situations; however, if you want to use it as an effective tool to manage your daily cash flow, it requires the extra effort of being connected to a cash reconciliation process that is properly maintained and reviewed periodically.
Before the days of online banking, the standard practice for both personal and business checking accounts was to reconcile a check register to a monthly bank statement. When accounting professionals adopted online banking into their processes, organizations tended to forgo the discipline of maintaining a check register as part of their reconciliation processes.
The following is a typical conversation I’ve had when consulting with clients on accounting process improvements:
Accounting professional, with a bundle of unsigned checks, “This is our process for obtaining check signatures.”
Me, “How do you know you have enough money in the account to cover these checks? What is your procedure?”
Accounting professional, “I checked the balance on line this morning.”
Me, “Where is the reconciliation to the check register? How do you know that all of the uncashed checks will not deplete the entire balance?”
Accounting professional, “I know there are not that many outstanding checks.”
Me, “When is the last time you reconciled the account?”
Accounting professional – answers range from a year ago to do not remember (not good) – to yesterday or a month ago (which is good).
As with using instant rice, there are times when viewing online balances without going through the reconciliation process are appropriate, but it’s not the final reconciliation tool.
Let’s try an experiment: If you are a CEO or President of an entrepreneurial company or a Finance Chair of a non-profit, ask the accounting department for the latest bank/cash reconciliation of the operating account. Ask specifically for these documents:
- The bank reconciliation
- A copy of the bank document to which it was reconciled
- The Balance Sheet balance to which it was reconciled
(Note: Publicly traded companies, financial institutions, insurance companies and other regulated industries have to maintain reconciliation procedures, so if you are in charge of one of those, regulation will take care of this.)
If you are bold enough to move forward with this call to action, my experience tells me about 50% of you will get a reconciliation completed in the last 45 days. If you get one and do not know how to review it, contact me for a free, no-obligation checklist that will guide you through a high-level review. If you do not get a reconciliation, and, in fact, get a blank stare from your accounting person, contact a financial professional to complete a review of your cash procedures and process. You may have plenty of cash flow today – however, that can change quickly if you do not appropriately manage it. Don’t risk finding yourself in a position where you cannot meet your basic financial obligations. “Cash is king” is a cliché’ for a reason – it is a requirement to run almost any type of business.
Mindy Barker & Associates works with entrepreneurial business owners to empower them with the tools and financial information to improve company value, profitability, and cash flow. To find out more on how you can be empowered, contact them today at firstname.lastname@example.org, or call 904.728.2920.
Nonprofit leaders often make decisions about adding structure, enhancing staff expertise, or conducting advanced planning in response to a risk situation, or, as an afterthought. Savvy leaders recognize the need to make periodic adjustments to processes, staff and technology resources if they want to stay on the path to financial brilliance.
Donors have many tools to assist with decision-making. GuideStar is a tool most sophisticated donors use. GuideStar is a public charity that collects, organizes, and presents the information in a neutral format. GuideStar publishes your 990, providing potential donors with full access to the information. Do you know what your GuideStar rating is? The process of adding the appropriate information to receive a Gold (the highest level) rating takes less than an hour and the return on that investment is providing transparency and financial clarity for sophisticated donors.
Take this quiz to see if you are on the right path to financial brilliance, or if it’s time for one of those adjustments, then tally up your score to see where you stand:
- Do you have a financial professional on staff? How often do you forego infrastructure development to save money? When you engage the expertise of a CPA on your team, the next six characteristics can become reality.
- Do you have an annual budget? Navigating the fiscal year without a budget is like driving down the interstate blindfolded. By reviewing past revenue and expense flows to forecast future income and expenses, you can create a budget to see where you are going.
- If yes, do you monitor actual vs. budget? The annual budget is a dynamic document, meant to be part of your monthly financial review process – planned versus actual expenses. It’s OK to make periodic adjustments, a process that helps you know if the company goals are on track.
- Is your G/L infrastructure meeting the need? If your monthly financial reporting: (a) is either non-existent, or (b) is not helping you run your business, consider a review and restructuring of your GL. Make it work for you – not the other way around.
- Do you have an endowment fund? If yes, ensure accountability with a documented Endowment Fund Management Policy and related procedures.
- Do you have restricted funds for operations? With the help of your financial professional, meet the obligations to record, report, and effectively manage restricted funds by understanding the requirements. Document how your company meets these obligations in your fund management policy and follow the practice in day-to-day activities.
- Do you have grants and loans with covenants? As with restrictions, part of monthly reporting should be key indicators on how the business is complying with covenants.
- Do you know the core financial data contained on your organization’s 990 and its GuideStar rating? Knowing the answers to the questions before potential donors is a must to maintain credibility and be in the best position to make the “ask”!
How many “Yes’s” did you score on the Financial Brilliance Meter?
0 – 3 – Financial Dunce
3 – 5 – Financial Aptitude
6 or more – You are on the road to Financial Brilliance!
Whether it’s creating your first budget, enhancing your general ledger infrastructure or reviewing and tightening up financial reporting, successful leaders ensure these characteristics are part of their culture. This financial clarity helps ensure stability to carry out your mission.
Raise your Financial Brilliance score, let Mindy Barker & Associates show you how. We can help you gain the financial brilliance that empowers you with the tools and financial information to improve company value, profitability, and cash flow. Contact me here.
Each month end, financial reporting packages are prepared in companies across the nation and promptly filed…somewhere. In most cases, the accounting team has prepared these analyses and turned them over to a senior leadership team who really does not understand how to use them to run the business. Reams of paper reports stand in piles, creating more of an environmental concern due to the use of paper, than the financial concern needed to effectively run the business.
Even though the accounting department has included a tremendous amount of information that may help them prepare for the annual audit, have they contributed information relevant to the management of the business?
By implementing accounting best practices, such as streamlined processes and standard, relevant reporting, work effort can shift from processing to high value activities that invest in the business, such as special projects and guidance on improving the bottom line.
Time is money, and time spent to prepare irrelevant information is wasted. Month end packages should be concise and provide information about the relevant Key Performance Indicators identified by Management. Contact Mindy Barker & Associates to find out how we can guide your leadership team to discover, report and track monthly Key Performance Indicators that help you make timely and informed decisions in running your business.
As a cost center owner, have you found yourself being asked to approve expenses, but you have no clue where they came from? You know you have a budget, but do you truly understand how it was developed or how you are supposed to work with it on a daily, monthly, quarterly and annual basis?
In the course of the budgeting process, an isolated group often prepares budgets in a vacuum, failing to include the right people in the process. This leads to confusion and frustration when the budget-to-actual expense is compared each month. I have often experienced meetings where budget-to-actual variances are discussed and the manager approving the actual expense (a) has no idea how the budget was prepared and (b) cannot answer any questions about the budget-to-actual variance for the month. This leads to the Board, President and Senior Leaders reviewing and approving a budget based on inaccurate information. They may have unrealistic expectations when planning for the next year as the expenses budgeted in each cost center is inaccurate. Make sure your budget process is well planned out and includes all the responsible parties.
Please contact me if you would like to have your budget process reviewed to learn how to include all of the right contributors, avoid setting unrealistic expectations and finding surprise variances each month.
Cars built in the early 2000s that had a built-n GPS required periodic updates using a CD with new roads and street addresses. If you are still driving around with a GPS of that era, you already know that when you get to a new construction area, the GPS will confuse you more than help you get to your destination. This analogy is similar to preparing an annual income statement for a budget without updated information. The annual income statement will show the projected revenue and expenses – but will leave out critical pieces of information vital to the day-to-day planning of a business. Here’s an example of what I mean: revenue is highly seasonal but expenses are spread throughout the year, causing issues with covering expenses month to month. Actual cash flow and the ability to cover debt service payments are not analyzed solely with an income statement. Another example: internally developed software can cost a lot of money; the cash required for the development is maintained on the Balance Sheet and not the Income Statement.
Lack of proper planning and analysis, and failure to prepare a projected-by-month Income Statement, Balance Sheet and Cash Flow can lead to an unplanned cash crisis. Please contact Mindy Barker & Associates if you would like to have your budget process reviewed to determine how you can avoid such crises each month.