Upcoming changes to ASC 606 could have an impact on audit fees moving forward. At least that’s what about half the attendees at a recent webinar think.
In Part 2 of our 4-Part series around Revenue Recognition and preparing for ASC 606, we heard from Prasadh Cadambi, Partner at KPMG and someone that has been living and breathing ASC 606 for over eight years. Cadambi spent two years with the Financial Accounting Standards Board, FASB, specializing on Revenue recognition which led to his experience with ASC 606.
Companies in all industries are going to face changes from the transition in revenue and expense accounting, Cadambi noted. The standard requires businesses to capitalize commission costs of the expected contract. The change to the revenue and expense accounting will have an immediate PnL benefit because of the capitalizing of sales commission.
A polling question around audit fee increases due to the adoption of ASC 606 stirred up some conversation. Not only did we find that about half of the attendees see some impact to the audit fees but what was even more interesting was the discussion around disclosures. ASC 606 has very incremental disclosure requirements, one around the backlog disclosure requirement and the amount of interaction your auditor has on the requirement. As an auditor, you must sign off on the backlog numbers on a quarterly basis as well as the numbers on the contracts. With the complicated specifications around contract terms in ASC 606, there needs to be thought around the terms and transaction prices. Auditors must be involved on the future roll out of how the revenue will be recognized.
Cadambi’s advice on ASC 606 and back office systems? “If you have too many systems, it will be problematic.” Have revenue recognition as part of your ERP system.
The webinar also provided insights into:
- Impact on private companies considering an IPO within 12 to 24 months.
- Areas that require the most judgement and interpretation.
- Audit fee impact on companies adopting the new revenue recognition standard.
- Impact on financials, resources, processes and internal controls of adopting companies.
- New audit procedures and testing.
- What technology can help mitigate the overall impact of adoption.
To get a greater understanding of ASC 606’s impacts from an auditor’s perspective, watch the recording (opens in new tab).
Join us for Part 3 of our Revenue Recognition series with Kash Rangan (opens in new tab), Managing Partner Merrill Lynch for Wall Street’s view of the impact on ASC 606.
