Revenue Recognition for Portfolio Companies of PE Firms

Private Equity firms invest in companies and from day # 1 onward the partners and principals at the PE firms spend a lot of time strategizing and following a value creation plan for each portfolio company that is determined way ahead of making their actual investment in the company.

One topic that is monitored closely is how each portfolio company recognizes and reports revenue.

Why is this such an important and hot and timely topic?

The new standard will impact every business in some way. The IRS and FASB Board have jointly implemented new rules about how and when a company recognizes revenues from contracts that affects both public and private companies. Both types of companies must adhere and adjust to the new compliance driven accounting rules and standards set forth by both Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB). The new standard is called ASC 606 (FASB)/ IFRS 15 (IASB): Revenue from Contracts with Customers.

While the new guidance primarily affects the accounting and financial statement disclosures relating to revenue, complying with the Standard may also require companies to change operational processes, enhance/implement new internal controls, change/update IT systems and business systems, and change sales incentives and current contracting processes. New estimates and judgments my need to be considered in company’s FP&A (Financial Planning & Analysis).

The deadline for publicly traded firms passed last December 15, 2017 and non-public (private) companies, must be in compliance by December 15, 2018.  One used to think that the new standards were far off into the future. A company can not afford to wait any longer. Planning and preparation must take place now in order to get your accounting and financial reporting systems and processes in compliance with the new standard by the December 15, 2018 deadline.

Many firms have been lacksidazicle about following up and actually taking the new rules seriously and implementing change and overseeing their portfolio companies and not really realizing the true overall impact that these new standards may actually have upon their own portfolio and their overall budget. Many firms think they may be in compliance and nothing else is needed to be done. Other firms may think they have already done enough work to show they are in full compliance. But they are not and more must be done to pass their audit or avoid an IRS examination.

SolomonEdwards has developed a well thought methodology that is proven in the field and accepted by many of the top audit firms across the country in order to insure that PE firms and their portfolio companies are in solid compliance with the new standard.

In my mind, there are some key important steps that a partner should take right away if they are not sure whether they are in compliance yet or not:

Step 1 – Make a Plan now. Time is of the essence. Conduct a pre-assessment study on the portfolio company with an outside independent firm with a fresh set of eyes and review the revenue stream and revenues cycle documentation.  Know your contracts!

Step 2 – Interview and Analyze – Interview key revenue cycle process owners and stakeholders and analyze customer contracts. Identify gaps and build a “gap analysis”

Step 3 – Prepare an Assessment – Prepare a preliminary impact assessment document

Step 4 – Review and Finalize – Review preliminary Impact Assessment with company management and auditors to finalize as appropriate.

Step 5 – Implement necessary changes to business and accounting processes to achieve and sustain compliance with the new standard. Get a signoff from your auditors.

Step 6 – Sit back and relax, feel confident that you are now in compliance.

 

If you have any questions, please feel free to reach out to me directly at SolomonEdwards (contact info is below) and I can provide you with more specific information or put you in touch with some of our revenue recognition specialists for ASC 606.  Our professionals are deeply knowledgeable and experienced in reviewing your firm’s financial reporting policies, processes and IT systems that may need to change in order to comply with the new ASC 606 standard.

 

Brad McGowan  | Director – Private Equity

SolomonEdwards | M&A Transaction Advisory Services Group

Senior Relationship Manager – National Business Development 

122 East 42nd Street,  17th Floor,  New York, NY   10168

T: 212-679-4440  |  C: 201-248-0635 | FAX: 484-561-2359

E: bmcgowan@solomonedwards.com

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s