As Consumer Products (CP) companies are well aware, Financial Accounting Standards Board (FASB) and International Financial Reporting Standards (IFRS) issued a new joint standard on revenue recognition replacing existing Generally Accepted Accounting Principles (GAAP) and IFRS revenue guidance. Most companies will begin applying the new revenue recognition standard in annual reporting periods beginning after Dec. 15, 2017, including interim reporting periods within that reporting period.
What’s Changing & Why?
The new revenue recognition model is designed to enable more consistent financial statement comparability across categories, companies, and industries by providing more clarity for expenditure accounting between gross-to-net sales. Subsequently, the new standard may change the contour of revenue and profit recognition for some companies as it is more prescriptive, requires more disclosures, and also introduces new complexities when compared to current guidance. This is especially true for CP companies that tend to allocate investments in trade incentives, price promotions, or shopper marketing campaigns to boost top-line growth by influencing consumer purchase behavior.
In order to ensure compliance, CP companies will need to understand how their internal processes, financial reporting practices, and systems will be affected and then orchestrate appropriate plans to minimize commercial disruption and engender full compliance.
Naturally Clarkston recommends that all affected companies approach the revenue recognition change by conducting a comprehensive impact assessment to underscore gaps, risks, and opportunities. Your impact assessment should also include collaboration with key trading partners to incorporate their input and maintain alignment moving forward.
Clarkston also believes that the mandated revenue recognition ‘change’ should serve a greater, and more strategic, cause. We believe it should motivate CP companies to reconsider how they plan and execute marketing investments to capitalize on shifting customer and consumer expectations and stimulate growth.
In our view, the CP industry has reached a critical juncture where rapidly changing consumer dynamics, shopper behavior, and retailer consolidation in aggregate have compounded to diminish the effectiveness of go-to-market models that are overly dependent on siloed and often discrete brand, trade, and shopper investment schemes.
Instead, CP companies should chart a differentiated course predicated on a holistic view of all marketing investment types to drive superior consumer experiences and sustainable growth.
The key question for the upcoming revenue recognition change is really ‘under which lens do you perceive it?’
- A ‘compliance’ lens where the goal is mere conformance, or
- An ‘opportunity’ lens where the goal is to proactively leverage it as a strategic ‘inflection point’ for change
Let Clarkston help you conform and capitalize if your proclivity is toward the latter.