Question

Does the accounting change in revenue recognition for a new system which requires the recognition of deferred revenue matter to managers?

Answer 1

Revenue recognition is followed under latest guidelines issued under ASC 606 by the FASB. It provides the basis to be followed for revenue from contracts with customers.

If there's a change in revenue recognition due to change in the system/process due to which deferred revenue in the books needs to be recognized, it'll surely impact the manager & concerned management since it'll lead to immediate rise in revenues with corresponding decrease in forthcoming periods. This might impact the financials, tax calculations, incentive payouts, budget vs actual variances, revision of finance budgets, stock fillings, listed stock prices and eventually shareholders. The subsequent impact will be the fall in future revenues since the deferred revenues have already been booked bringing shock/displeasure to the management/shareholders in future.

Hence, it's advised to review the accounting policies with proper supervision and should be only changed under the guidance of accounting experts/auditors with caution. The reason for change should be material like statutory requirements, compliance provisions and process changes in line with management vision.