We discussed in a previous blog post how the new revenue recognition accounting standard, Revenue from Contracts with Customers, or ASC 606, has more than just a financial statement impact on businesses. There are decisions to be made and actions to be taken around operations, information systems, and business processes, as well.
Prepare Now for Smoother Transactions
One area of impact you may not have considered is how ASC 606 affects transactions for those planning for or currently involved in mergers or acquisitions. The broad presumption is that since the standard doesn’t affect cash flows, it doesn’t affect business valuations. But it absolutely affects projections of future revenue. If you’re the target, and you haven’t assessed how ASC 606 will impact revenues, you can expect potential buyers to penalize you for it. For example, they may increase their due diligence efforts, which will affect your operations as you field these additional queries. Buyers may even require a holdback of funds until proper accounting is completed.
Budget Accordingly for Upcoming Expenses
Beyond being able to project revenue under ASC 606, buyers and sellers need to consider the potential operating expense and capital expenditures required for implementing the standard. Consultants may be necessary to train and work alongside existing accounting staff through the transition from old revenue model to new, to assess and restructure revenue-dependent compensation programs, and to assist in developing new accounting policies involving material management estimates. New ERP system implementation or customization of current systems may also be required to capture relevant data. If the target has done little to prepare for implementing the new standard, these expenses have probably not been budgeted adequately, if at all, resulting in future cash outflows that have not been baked into the target’s model.
Overcome Unforeseen Obstacles
Even for targets that have started implementing ASC 606, there may be unforeseen obstacles to successfully closing a deal. Because of the comparative latitude granted by the new standard for certain key decisions, such as expensing or capitalizing certain costs, restating prior periods or not, etc., it is critical for both the acquirer and the target to dive into how implementation decisions have been made and whether they materially change the desired outcome of the deal.
Find Flexibility in the New ASC 606 Standard
But the news is not all cringe-worthy. One of the major criticisms of the current revenue recognition standard is that U.S. companies are at a disadvantage in the cross-border M&A market due to the stringent, rules-based recognition requirements that apply to U.S. companies. The new standard falls much more in line with international financial reporting standards (IFRS), which apply a principles-based approach that often results in earlier recognition of revenue and should make U.S. company financials more comparable with those of foreign entities. Moreover, the new standard offers greater flexibility in pricing for multiple element arrangements that should make it easier for companies with different pricing strategies to combine without a lot of accounting impact headaches.
9Gauge is prepared to partner with you in implementing ASC 606, from educating key stakeholders on the new standard to contract review, decision guidance, and identifying and implementing the software necessary for compliance. Contact us today to learn how we can help.