The new revenue recognition regulations are old news, right? This may be true for public companies but many private companies are still assessing their situation. According to a recent PwC webinar poll, (Revenue Recognition: “Next-stage” Implementation Insights) 36.4% of private companies are still “assessing the impact.”
Private companies may be under the belief that because their revenue recognition seems straightforward, ASC 606 does not impact them materially. This was certainly the way 24 Hour Fitness thought of revenue recognition compliance. “My initial thoughts were - we are a gym, everything is pretty straight forward,” remarked Kristine Stebbins, VP of Accounting at 24 Hour Fitness. She would soon find out that wasn't exactly the case.
24 Hour Fitness has over 4 million members and 400 clubs across the U.S. Memberships are offered on a month to month basis or a longer contracted term, following the payment of an upfront membership fee. The result is approximately 40 million transaction lines per month. The environment is one of high volume and fairly routine accounting entries. Their accounting systems, however, were struggling with the business growth and 606 would only make it worse. Existing systems were mostly 14 years old; an Oracle billing system for AR and orders, PeopleSoft for their GL and custom systems for retail and training. These systems were supplemented with many Excel spreadsheets.
It took a huge effort to produce data the way 24 Hour Fitness wanted it to be. The old systems couldn’t quite capture what was needed in the modern business of today. The amalgamation of systems was high risk from an accuracy point of view, “amortizing on spreadsheets was something we really needed to move away from,” Stebbins said. A recognition of failing, inadequate systems was acknowledged. They needed to make a change to increase efficiency and also to manage the new compliance requirements.
ASC 606, a catalyst to change
Stebbins plan of attack was to first approach the systems. "With 606 we weren’t going to put a new process on top of the existing systems. We knew it was going to break, we just didn’t know when,” Stebbins noted. She also reiterated what many customers have said, that “606 just moves people along.” Whether it gives credence to upgrade requests or a greater sense of urgency, compliance is the push that many departments need to justify the expense of a new system.
The effort of integrating contract data into a system
After scoping and designing a solution, Stebbins realized it was going to be a big effort for them to do the data integration. ASC 606 requires a different way of looking at contracts which can double the workload in many cases. This process of data extraction for 606 is quite intensive. The right data needs to be extracted at the right time with the appropriate transformation. Data also needs to be checked to see if it has been combined or chopped off when extracting the transfer load. By going through the process of extracting, transforming and loading their data as a team, the 24 Hour Fitness finance office were able to discover where the data deficiencies and gaps were in the contract data and then fix that break. The result of this intimacy with their contract data was a more insightful and intelligent validation of their rules and configurations when the time came to put that data into their new system.
An empowered finance office
Implementing Aptitude RevStream's out-of-the-box, configurable solution gave 24 Hour Fitness the ability to take on the functionality and configuration themselves without pulling in their IT team or an external team of consultants. In the past, the team were stuck using spreadsheets to manipulate and aggregate data. Now they work from a single source of truth that they know and trust. By being an active partner in the implementation, they got to understand Aptitude RevStream well and definitely love the efficiency improvements in their day to day life. “RevStream gives us the flexibility on the accounting team to create new use cases as business processes changed without waiting for IT or having to find a manual solution,” Stebbins added. Knowing what and why you run configurations and rules helps teams in the long run. In the short term it certainly saves on professional services. In the long term, the team is empowered and prepared for business growth & new compliance regulations that emerge.
The finance office now has great confidence in their decisions and can see the accuracy and efficiency gains. Further, as the company expands through growth and/or acquisitions, they will be able to expand and/or integrate new data into Aptitude RevStream themselves. This is a definite cost saver for growing companies.
Advice for those still evaluating their position on automation
When asked if she had any advice for private companies who are still implementing ASC 606, Stebbins suggested:
· Map out your revenue scenarios. Assess the impact for today’s GAAP (605) and tomorrow’s GAAP (606).
· Check with your auditor. In fact, involve your auditors straight away.
· Assess if your current systems can support the change. If you need to rely heavily on patches such as formulaic spreadsheets, consider the business risk.
· Partner with your IT department to create a sense of urgency and to leverage their knowledge. 24 Hour Fitness’ IT department began the search and encouraged Stebbins to look for a new system to achieve automation.
· If you are unsure, partner with an external analyst. The cost today is minimal compared to the fallout of a financial restatement or delayed reporting.
The right choice for revenue management automation
24 Hour Fitness run an efficient back office but the heavy manual workaround left limited in-house resources to draw from for this project. Aptitude RevStream was the right choice for this finance office because they now have:
· A single source of truth that pulls data from many systems.
· Vastly improved resource efficiency.
· An invested and involved finance team that can self-solve and configure revenue rules.
· A system that is ready for future growth.
· Achieved a streamlined reporting process for ASC 606 compliance.
An empowered finance office succeeds
At Aptitude RevStream we believe in empowering finance offices to understand their software and to fully utilize it. New in 2018 is a fully developed training module, built around empowered teams such as 24 Hour Fitness. Freedom from reliance on vendor tickets - for configurations that teams can do in minutes. RevConnect 2018 will unveil our new training modules for users, presented in a one-off Bootcamp style session this May.
If you need help planning your ASC 606 or IFRS 15 revenue recognition project we have a number of resources for you, beginning with: