Technology Banking
risk | 2 minute read

New accounting standards impact tech companies

Navigate the complex changes brought on by ASC 606, a new set of accounting standards affecting public businesses.

Accounting Standards Codification 606 (ASC 606), which became effective for public companies on December 15, 2017, is a new set of standards on how to recognize revenue from contracts with customers. The new standards have become a hot topic of conversation these days. We have asked John Leonard, head of Technology Finance Capital Finance and Matthew Daniel, managing director FX Risk Management at Wells Fargo, to explain how companies will be impacted.

ASC 606 requires a five-step method to determine revenue:

To a layperson, these new rules may not signal significant changes — until we get to the details. Let’s look at software companies, for example. According to Leonard, establishing vendor-specific objective evidence (“VSOE”) for maintenance will no longer be required to unbundle a software license component. The result may be more upfront revenue recognition for certain companies, and the ability to use additional discretion in determining separate values. “By all accounts, the impact will be huge,” says Daniel.

The impact of ASC 606 will be felt beyond revenue recognition. Companies will be required to capitalize certain customer acquisition costs over the life of a contract, as opposed to expensing costs as incurred. The change can impact implementation costs and sales commissions. And although cash flow is not impacted, companies will need to implement processes to help them evaluate all future customer contracts and prepare financial reports accordingly.

Accounting Standards Codification 606 became effective for public companies on December 15, 2017

The new standards will also impact the timing of foreign exchange (FX) earnings, and the way hedge relationships are managed.  For example, gains and losses on FX cash flow hedges are recorded under Accumulated Other Comprehensive Income (AOCI), and released to earnings when the forecasted transaction impacts the entity’s consolidated income statement.  Changing the timing of revenues also changes when hedge gains and losses are reclassified from AOCI to earnings. In addition, anytime hedge gains and losses impacting earnings are recognized in earlier or later periods, it becomes more complicated to understand how FX rates and any potential hedging will impact financial results.

Leonard shares that the upcoming rollout of the new standards has already required significant time, planning, and effort for companies across the country. “Clients we’ve talked to are spending countless hours trying to implement the necessary systems and processes. Those with active hedging programs, who are most impacted by the rule changes, seem to be ahead of the curve.”

Leonard and Daniel advise companies to seek the guidance of their accounting firms and IT partners well ahead of the ASC 606 rollout. Companies looking to designate hedges, reclassify hedge gains and losses from OCI to earnings, and understand how the moving parts fit together can consult with financial advisors or banks. Wells Fargo’s Analytics team in San Francisco can help companies model their exposure and understand the impact of FX rates on cash flow, so they can manage the new standards now and in the years ahead.

Disclosures

For discussion purposes, not to be construed as accounting advice. Wells Fargo Securities is not acting as your accounting advisor. You should seek guidance from your own advisors regarding accounting matters and the treatment and reporting of particular transactions and strategies.

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Securities Products:

Not Insured by FDIC or any Federal Government Agency

May Lose Value

Not a Deposit of or Guaranteed by a Bank or Any Bank Affiliate

© 2019 Wells Fargo Bank, N.A. All rights reserved. Deposit products offered by Wells Fargo Bank, N.A. Member FDIC. Deposits held in non-U.S. branches are not FDIC insured.

Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A. Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC are distinct entities from affiliated banks and thrifts.

© 2019 Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo & Company. Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Managed Account Services and Wells Fargo Funds. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA, an affiliate of Wells Fargo & Company. Neither Wells Fargo Funds Distributor nor Wells Fargo Funds Management holds fund shareholder accounts or assets. This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kind—including a recommendation for any specific investment, strategy, or plan.

© 2019 Wells Fargo Capital Finance. All rights reserved. Products and services require credit approval. Wells Fargo Capital Finance is the trade name for certain asset-based lending services, senior secured lending services, accounts receivable and purchase order finance services, and channel finance services of Wells Fargo & Company and its subsidiaries.

Wells Fargo & Company conducts business outside the U.S. through various companies, including duly authorized and regulated subsidiaries and affiliates in Asia, Canada, and Latin America. In Europe, banking services are provided through Wells Fargo Bank International (WFBI), directly regulated by the Central Bank of Ireland, and Wells Fargo Bank, N.A. London Branch, authorized by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the PRA. All products and services may not be available in all countries. Each situation needs to be evaluated individually and is subject to local regulatory requirements.

We provide links to external websites for convenience. Wells Fargo does not endorse and is not responsible for their content, links, privacy or securities policies.

Important notice regarding use of cookies: By continuing to use this site, you agree to our use of cookies as described in our Digital Privacy and Cookies Policy.

The opinions expressed in this document are general in nature and not intended to provide specific advice or recommendations for any individual or association. Contact your banker, attorney, accountant or tax advisor with regard to your individual situation. The opinions of the author do not necessarily reflect those of Wells Fargo Capital Finance or any other Wells Fargo entity.

The information in this report is for educational purposes only and should not be used or construed as financial advice or a recommendation to participate any strategy mentioned herein. Wells Fargo does not guarantee that the information supplied is complete, undertake to advise you of any change in its opinion, or make any guarantees of future results obtained from its use. The concepts discussed in the paper require the assistance of qualified legal counsel and tax advisors, and investors should consult their own attorneys and tax advisors with respect to their own situations.

  1. Silicon Valley Top 150 2017 Silicon Valley Top 150 Public Technology Companies Rankings by Annual Revenue

Disclosures

Securities Products:

Not Insured by FDIC or any Federal Government Agency

May Lose Value

Not a Deposit of or Guaranteed by a Bank or Any Bank Affiliate

© 2019 Wells Fargo Bank, N.A. All rights reserved. Deposit products offered by Wells Fargo Bank, N.A. Member FDIC. Deposits held in non-U.S. branches are not FDIC insured.

Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A. Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC are distinct entities from affiliated banks and thrifts.

© 2019 Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo & Company. Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Managed Account Services and Wells Fargo Funds. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA, an affiliate of Wells Fargo & Company. Neither Wells Fargo Funds Distributor nor Wells Fargo Funds Management holds fund shareholder accounts or assets. This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kind—including a recommendation for any specific investment, strategy, or plan.

© 2019 Wells Fargo Capital Finance. All rights reserved. Products and services require credit approval. Wells Fargo Capital Finance is the trade name for certain asset-based lending services, senior secured lending services, accounts receivable and purchase order finance services, and channel finance services of Wells Fargo & Company and its subsidiaries.

Wells Fargo & Company conducts business outside the U.S. through various companies, including duly authorized and regulated subsidiaries and affiliates in Asia, Canada, and Latin America. In Europe, banking services are provided through Wells Fargo Bank International (WFBI), directly regulated by the Central Bank of Ireland, and Wells Fargo Bank, N.A. London Branch, authorized by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the PRA. All products and services may not be available in all countries. Each situation needs to be evaluated individually and is subject to local regulatory requirements.

We provide links to external websites for convenience. Wells Fargo does not endorse and is not responsible for their content, links, privacy or securities policies.

Important notice regarding use of cookies: By continuing to use this site, you agree to our use of cookies as described in our Digital Privacy and Cookies Policy.

The opinions expressed in this document are general in nature and not intended to provide specific advice or recommendations for any individual or association. Contact your banker, attorney, accountant or tax advisor with regard to your individual situation. The opinions of the author do not necessarily reflect those of Wells Fargo Capital Finance or any other Wells Fargo entity.

The information in this report is for educational purposes only and should not be used or construed as financial advice or a recommendation to participate any strategy mentioned herein. Wells Fargo does not guarantee that the information supplied is complete, undertake to advise you of any change in its opinion, or make any guarantees of future results obtained from its use. The concepts discussed in the paper require the assistance of qualified legal counsel and tax advisors, and investors should consult their own attorneys and tax advisors with respect to their own situations.

  1. 2017 Silicon Valley Top 150 Public Technology Companies Rankings by Annual Revenue.