Regulatory changes, such as those introduced by tax reform, are impacting businesses on many different levels. And while big change often presents challenges, it can also create opportunities to transform your business, streamline your operations, and give your company a competitive advantage.

Capturing the Mindset to Revolutionize

Revenue Recognition and Lease Accounting

The new revenue recognition and lease accounting standards provide a significant change to how US businesses have historically valued products, contracts, and reported leases.

While revenue recognition has gone largely unchanged since the 1990s, the shift toward worldwide, principles-based standards for accounting decisions has impacted the way we do—and think about—business.

Nonpublic companies benefit from the lessons provided by public companies, which have been required to adopt the new revenue recognition and lease accounting compliance standards earlier. This provides nonpublic companies with good practices and allows them more time to adjust their processes and mindset.

This longer adjustment period presents a prime opportunity to assess more than accounting. It can be an opportunity for businesses to establish—or re-establish—approaches to the following:

• How to go to market
• How and with whom to develop alliances
• How to sell, procure, and define a business in a global marketplace

These changes also provide opportunities to win market share. Possible ideas to consider when beginning this process include integrating technical accounting into leases, or using advances in machine learning to read contracts.

Ramifications of Tax Reform

The sweeping tax changes introduced through tax reform are unlike anything we’ve seen in more than 30 years. Tax reform for businesses and individuals is comprehensive—significantly reducing C corporation tax rates to 21%, and affording pass-through entities a potential 20% tax deduction on certain qualified business income.

These changes will have significant impacts on choice-of-entity considerations, but, more importantly, on business investment decisions, the use of excess cash flow, and a business owner’s exit strategy or transition plan. 

Additional changes brought about by tax reform include:

• New rules for the recognition of revenue, including revenue from advance payments, for accrual basis taxpayers
• The availability of the cash basis method and simplified inventory methods for small businesses with revenues less than $25 million
• Significantly accelerated tax depreciation for qualified assets and any deferred tax liabilities associated with that acceleration
• Substantial changes to international tax provisions surrounding repatriation, dividends received deduction, and US multinationals’ choice-of-entity decisions

Combined, tax reform changes create an environment that lets many companies divert their funds into growth objectives—improving and innovating products and operational processes, and investing in new technologies such as accounting and reporting systems.

Examples

Many industries have benefited from opportunities presented through regulatory reform, including the following:

• While electric vehicles have been around since the mid-19th century, market trends and conditions have prevented them from widespread consumption. However, the US Government’s regulatory move to reduce hydrocarbon-based emissions through the US Environmental Protection Agency’s Clean Air Act, motivated vehicle manufacturers to develop or improve their electric capabilities—with companies like Toyota and Tesla leading the charge.
• The health care industry has benefited from organizations using regulatory change to develop new startups. Startup Health, for example, was launched in 2011 with the mission of helping 1,000 startups reimagine and transform healthcare over the next decade. By 2015, they had 90 companies in their portfolio, three of which were bought by major companies such as WebMD and Intel.

Integrating New Technology

Many companies subject to information security regulation are left to establish compliance with little direction. Compounding the challenge is the rapidly changing way technology systems are used and integrated.

Asking the following questions can help you determine if your company’s technology system is helping your business function at the highest level:

• Is our technology meeting our needs? If not, why?
• Do we have people in place to use the technology in the short term and long term?
• Are we compliant with the information security requirements of regulators?

Before making a technology and systems change, the prevalence of fraud and cyberattacks requires that companies consider the security of confidential business and customer information. It also requires people to think differently about the future of business. For example, HR teams can benefit from understanding how to get their organization to the next level—whether that means developing specialized skills, helping current employees adopt new skills, or supporting a new vision for the company.

A world-class ERP system might not be the right choice for every business. A company running multiple instances of QuickBooks, or those using Excel for reporting, may instead benefit from corporate performance management (CPM) software, which is designed for real-time reporting and rolling forecasts. Manufacturers may find it makes sense to follow the example of many European countries by moving to e-invoicing to address the complexity of value-added tax (VAT).

There may be high-impact opportunities for improvement, and thoughtfully applying technology can be transformative all on its own.

Global Accountability

The European Union created the first attempt of a global privacy standard with their Global Data Protection Regulation in May 2018. The regulation is important because it puts ownership of personal data back into the hands of the people—affording them both privacy and choice. Addressing these issues for customers without the pressure of regulation can earn businesses the respect of their clients and business partners.

Accountability for data privacy begins with knowing the following information:

• What data you collect
• Which data is stored
• Where data is stored
• Who has access to the data
• How sensitive the data is
• How data is removed from your systems

The pseudonymization of data, a procedure where most identifying fields within a data record are replaced by one or more mock identifiers, or pseudonyms, keeps businesses at the cutting edge of both regulatory compliance and customer satisfaction.

Recognizing and respecting people’s desires to have control over their personal data is a hallmark of a 21^st century business that values its employees’ needs and preferences.

Transforming the Business

Once you’ve assessed the impact of the regulation and reforms on your business, you can begin to progress towards the transformative objectives that will fuel your operational goals. Moving towards a people-centric environment can be an impactful driver for business. While accounting for each person is not a reasonable business goal, it’s possible to bring employees along as cobuilders of the business vision.

Whether you decide to implement a new system, reengineer processes to align with popular trends, or restructure your business in multiple stages inspired by regulatory change, here are a few guidelines to expedite your transformation:

• Commit to a top-down approach—without commitment and buy-in from leadership, initiatives are more likely to fail
• Identify the purpose and impacts of the changes
• Understand the people and the context in which they work
• Include people in the information-gathering process and ensure they understand how their jobs will be affected
• Create role-impact guides and establish peer champions
• Consider the changing needs and demands of your customers
• Address technology needs
• Develop an as-is map and a to-be plan
• Create an implementation plan
• Establish clearly defined goals
• Communicate the plan and the vision
• Anticipate the impact changes will have on employees and manage the transition
• Brace for continuing implementation through slow adoption
• Celebrate successes and planned milestones

This process can help your organization drive change rather than respond to it in an obligatory manner.

Next Steps

As you work through reorganizing your business, you may start seeing the advantages of using required changes to re-envision your organization. By adopting goals that put people first, you may see improved outcomes in employee retention, enhanced employee engagement, and better customer responses—resulting in reputational improvements and sales increases.

Tax reform and other regulatory developments provide a prime opportunity to adopt change. When implemented with intention, compliance and change are powerful catalysts that can help your company continue to stay competitive in the marketplace.

We’re Here to Help

To learn more about using regulatory changes to transform your organization, contact your Moss Adams professional.