Question

Background Getswift Ltd (“Getswift”) is a newly listed company involved that provides a software distribution solution. The board has heard that a new revenue standard has been issued and as none of the board has a financial background, they are unsure what it means for them. They have heard though that the impact of the new standard on most businesses will be significant. As a result, they have engaged your consultancy firm to provide them with a letter of advice to explain the impact that the new standard will have on the income recognition of Getswift. REQUIRED You are required to provide a letter of advice to the board of Getswift explaining the requirements of the new revenue standard with a focus on how it will impact their particular revenue recognition. In addition, you are required to write a short transmittal email enclosing the letter of advice. Important Additional Information ? You are expected to research this company and gain an understanding of what they do so that you understand the nature of their revenue. The 2016/2017 annual report should be used as a starting point but you are expected to go further than this. ? This assessment requires much more than copying the requirements from the new standard and those students that just do this will be marked poorly. The majority of the marks will be for the application of the standard to Getswift’s revenue sources. Therefore, you need an understanding of what they do. ? The language of your letter of advice should be tailored to the audience and their level of financial literacy.

Answer 1

GetSwift Limited is a logistics management software company. The Company provides a cloud-based software-as-as-service (SaaS) platform that streamlines delivery and logistic channels for businesses. The Company's delivery tracking software platform optimizes routes for businesses to deliver their products to end customers automates the delivery dispatch process. It provides real-time tracking and alerts to both the sender and the receiver via mobile devices. The Company's algorithm chooses the appropriate driver based on the location, mode of transport and distance to drop-off. It increases customer loyalty. It monitors the driver's service and performance. It monitors the customer feedback in real-time. It allows clients to place new delivery bookings via their own white labelled booking form. It captures photos, delivery notes and digital signature as proof of delivery on the driver application.

Revenue is one of the most important measures used by investors in assessing a company’s performance and prospects. However, previous revenue recognition guidance differs in Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)—and many believe both standards were in need of improvement.

On May 28, 2014, the FASB and the International Accounting Standards Board (IASB) issued (press release) converged guidance on recognizing revenue in contracts with customers. The new guidance is a major achievement in the Boards’ joint efforts to improve this important area of financial reporting.

Presently, GAAP has complex, detailed, and disparate revenue recognition requirements for specific transactions and industries including, for example, software and real estate. As a result, different industries use different accounting for economically similar transactions.

The objective of the new guidance is to establish principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The new guidance:

• Removes inconsistencies and weaknesses in existing revenue requirements
• Provides a more robust framework for addressing revenue issues
• Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
• Provides more useful information to users of financial statements through improved disclosure requirements, and
• Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer.
• On May 28, 2014, the FASB completed its Revenue Recognition project by issuing Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new guidance establishes the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers.
  
  To that end, the new guidance:
• Removes inconsistencies and weaknesses in existing revenue requirements
• Provides a more robust framework for addressing revenue issues
• Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
• Provides more useful information to users of financial statements through improved disclosure requirements
• Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer.
• The new guidance affects any reporting organization that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts).

Based on our experiences with numerous companies in a variety of industries over the last three years, here are a few practical tips and insights to consider as you work through your adoption, whether you are performing it internally or leveraging outside help:

1. The new standard is principles-based! There may be one, five-step model for all companies to follow, but there is considerable accounting judgment to be applied as we move away from a rules-based model. For instance, estimating the variable consideration at the outset of an arrangement or assessing whether options in a contract should be accounted for as a material right are not straightforward decisions.

These judgments may be challenging to calculate and even more challenging to audit, so be sure to create proper documentation to provide evidence of how the principles of the new standard are applied to your fact pattern.

2. Inventory and document critical technical accounting positions – take a view. We have seen hundreds of accounting position papers with a lot of highlighting and questions in the margin. Work with your finance team, contract owners, and advisors to formalize accounting positions as soon as possible. Critical stakeholders need to be educated on the impact of the new standard, including the board of directors, executive leadership, and your external auditors. Don’t leave them in limbo.

3. Understand the implications of choosing a transition method. Both transition methods (full retrospective and modified retrospective) have benefits and challenges, and you will not know which method is best until you get started on assessing the impact of the new standard. There is no right answer to which method to choose. With no precedent regarding how to transition to a new model, it is imperative to think through both the logistics of this new standard and the needs of your stakeholders.

4. Engage your external auditors. You are not the only ones with a lot to do. Your external auditors must audit your technical accounting positions, ascertain the completeness and accuracy of the beginning retained earnings adjustment, understand processes to properly apply the new standard post-adoption, and evaluate the company’s internal controls as part of the adoption effort, as well as changes in information systems and new business processes. This leads us to our next point of emphasis.

5. Be organized, own the process (it is not too late), and be audit ready. Ensure all steps of the adoption process are documented – from technical accounting positions to process changes and internal control considerations. The more organized a company and well-documented your adoption process, the smoother the audit process.

Even if you feel the new standard will not impact your business, you still must go through the process of proving this to management and your auditors.

6. Don’t underestimate the value of project management. Companies have underestimated the amount of time and resources necessary to adopt the new standard. If you think your company is behind, you are probably right. Engage a project manager to align resources, work streams, and organizational objectives. This will allow management flexibility to respond and adapt to unforeseen challenges.