New Standards May Impact Budget ProcessPosted: March 27, 2017
With everyone focusing on the accounting and disclosures associated with the new revenue and leasing standards, the longer term implications of the impact those standards will have on the traditional budgeting process may have been overlooked. I want to spend a little time to give you some food for thought on the budget implications of these new standards.
The hidden impact of the new revenue standard is on the expense side. The standard not only changes the way companies recognize revenue, it also requires the deferral of potentially significant amounts of installation and acquisition cost, especially for companies in service industries. The traditional budget process includes a budget for revenue, expense and capital expenditures. In general, these were good proxies for cash coming in and going out of a business. Now with the requirement to defer potentially significant amounts of expense and then amortize those deferrals over several years, expense budgets may lose their connection to cash being spent by the business. Because cash is ultimately king, a business might want to think about the need to set up a “deferred cost” budget much like they have a capital budget today.
A capital budget is a way of reflecting and managing the cash needs of the business which will be recorded to the balance sheet instead of the income statement. A differed cost budget would, in concept, be the same thing. It would be a way to manage the cash used by the business when that cash outflow is hitting the balance sheet rather than the income statement.
The new leasing standard may not significantly impact the income statement recognition of lease expense, but it will require all leases be recognized on the balance sheet. Depending on the volume and dollar amount of leases, this could significantly expand the balance sheet of a business. With leases now impacting the balance sheet as well as the income statement, the traditional budget mechanism of an expense budget to manage leases may not seem like enough to a business leader. They might want to consider a “new RTU” budget which would be similar to a capital budget.
Such a budget, however, would have a different purpose from the cash management focus of a capital budget. Instead this budget would be focused on the amount of assets (and liabilities) on a balance sheet which impact key metrics such as return on invested capital or total liabilities to equity. If metrics important to the business will be impacted, then management might want to be sure they are appropriately managing those impacts. And what better way to manage those impacts then through the tried and true budget process.
So as you go about your work of implementing these two significant changes to accounting, you might want to also take a few moments to think about how you should change other processes that will be impacted, like your budget process.