That’s why we share a great sense of accomplishment in having adopted the new rules a full year before the deadline. As Workday’s CFO, I want to address a few key points on why we adopted early and how were able to accomplish the change so quickly.
Why was it important to Workday to be an early adopter?
Simply stated, we knew we could adopt early and felt it was important to share that experience with two core audiences.
First and foremost was the value that we thought we could bring to Workday customers. We know that when we can be the first to use newly released Workday products and features, we can share that experience and knowledge with our entire customer base. As one of the first users of the revenue recognition functionality in Workday Financial Management, we can now share our insights and help our customers as they work through their ASC 606 adoption process.
Over the last year, we also observed growing curiosity in the investor community around how this standard will impact public companies. Given our focus on investor transparency, we felt it was important to provide the earliest possible visibility into how the new standard impacts Workday. By adopting the full retrospective approach, we will start our fiscal year on the new standard and not be reporting under both methods as required under the alternative approach (modified retrospective approach) permitted under ASC 606.
How are Workday’s financial statements impacted by the new standards?
At a high level, the impact on the income statement is twofold:
First, the new standard impacts the timing and classification of revenue for many of our customer contracts. In applying the standard retroactively, we had revenue changes in all periods and actually had some revenue “disappear” into our beginning retained earnings balance. In general, the standard simplified our subscription revenue recognition and added complexity to our professional services revenue recognition.
Second, the new rules require that we defer more contract acquisition costs and amortize those costs over a longer period of time.
There is also some movement in the balance sheet with increased assets for deferred costs, changes in deferred revenue, and the introduction of unbilled receivables. Importantly, and consistent with our belief in value of looking at cash flows, the standard has no impact on our cash flows statement.
How was Workday able to accomplish this milestone?
When Dave Duffield and Aneel Bhusri co-founded Workday, they focused on delivering true cloud applications—like Workday Financial Management—that equip customers to more easily keep pace with complex changes driven from within their businesses and the outside environment, including regulatory changes such as ASC 606.