Contributing Author: Paul Menter, Chief of Corporate Strategy at RMC
There has long been an industry standard in DMC contracting to wait until after a program is completed and all services have been rendered to realize when revenue has been earned.
As a widely known best practice for business bookkeeping, the Accounting Standard Codification (“ASC”) 606, states that an organization entering into contracts for the delivery of products and/or services should align the recognition of contracted revenue with the fiscal periods in which work is performed in execution of the contract’s requirements.
In terms of a DMC, this means that you could bill for, and recognize revenue, based upon completion periods (or program life cycles), beginning at the time of contracting and ending with completion of a client’s program.
This accounting standard, adopted by the Financial Accounting Standards Board (“FASB”) in May of 2014, is relevant to DMCs because of the incredible benefits it could provide to DMCs if adopting as an industry-wide “best practice” revenue recognition model.
The primary benefit to DMCs would be the ability to match revenue recognition with the periods in which work is performed – primarily time expended in program planning. This is especially important during those fiscal periods when DMCs incur the majority of their labor costs in planning client programs, instead of “floating” those expenses on the basis of client deposits, that may be refundable to the client under cancellation or force majeure terms.
If adopted on an industry-wide basis, this standard will have the effect of:
Reducing DMC liabilities leading up to program execution in the form of deposits received that have not been recognized as revenue.
Allow DMCs to match financial exposure to unanticipated industry-wide disruptions such as COVID-19, as well as individual force majeure events.
In order to take effect, client contract terms must reflect thresholds of planning completion and DMCs must demonstrate the value of that work completed to clients as a basis for recognizing the revenue provided by the client in advance of the actual program dates.
DMCs will need to continue to ask clients for deposits to secure venues, activities, contracted services, etc., under terms similar to those used currently by the industry.
While adding this combination of revenue and deposit income will add a layer of necessary complexity to financial management and accounting practices, the benefit of recognizing revenue to offset DMC services delivered prior to the program start date will benefit the DMC in the long run.
Today's Tip: ASC 606, like other potential resources, is not a cure-all. However, its theory may offer substantial guidance toward finding a solution or, at the very least, an improved circumstance. Do not get stuck in the "it's always been this way and will always be this way" mentality. Look beyond how it's always been done and consider new alternatives.