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Are you ready for revenue recognition?

Jan

23

January 23 , 2018 | Posted by Lydia Ritze |

Are you ready for revenue recognition?

As the effective date of the Financial Accounting Standards Board’s new revenue recognition standard approaches, there’s increasing pressure on companies to assess their customer arrangements and implement the new guidance. For private companies and not-for-profit organizations, the new standard will apply to annual reporting periods beginning after December 15, 2018 (including interim periods). Understanding the new standard and evaluating its impact is a complex undertaking. Here are some considerations for implementing the new revenue recognition guidance:

  1. A new revenue recognition model

It is important to obtain an understanding of the new guidance. Accounting Standards Update No. (ASU) 2014-09, Revenue from Contracts with Customers, established a new core principle for revenue recognition “to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” It created the following 5-step process for recognizing revenue:

  • Identify the contract(s) with a customer.
  • Identify the contract’s separate performance obligations.
  • Determine the transaction price, using extra scrutiny if a contract calls for variable consideration, such as bonuses, incentives, rebates or penalties.
  • Allocate the transaction price to the contract’s performance obligations, if there are multiple performance obligations.
  • Recognize revenue when (or as) the entity satisfies a performance obligation (that is, when the customer obtains control of the good or service).

The need to identify separate performance obligations — distinct promises to transfer goods or services — is critical. To make the transition to the new standard, companies may elect full retrospective application, which requires prior-period financial statements to be recast; or modified retrospective application, which doesn’t require recasting, but does require the cumulative effect of initially applying the standard to be recorded as of the initial application date.

  1. Impact assessment

A company must assess the impact that the new guidance will have on their revenue recognition. For some companies, the amount and timing of revenue recognized under the new standard will not differ significantly from their results under current U.S. Generally Accepted Accounting Principles. But management will still need to make the analysis under the new standard’s requirements to reach that conclusion. In addition, all companies will be affected by the new standard’s disclosure requirements, regardless of its impact on revenue. The new rules expand disclosure requirements and require qualitative and quantitative disclosures intended to provide information about a company’s contracts with customers. The disclosures must include information about revenue and cash flow stemming from such contracts.

When making the assessment, it’s important to seek input from a wide range of departments, including accounting, tax, financial reporting, financial planning and analysis, investor relations, treasury, sales, legal, information technology and human resources. Management should also consider the standard’s potential impact on the following specific aspects of the company’s business:

  • Simple point-of-sale transactions,
  • Bundled goods or services,
  • Reward or loyalty programs,
  • Vendor incentive programs or penalties,
  • Rebate programs or return or refund provisions,
  • Contingencies, warranties or guarantees,
  • Noninterest fees or other noninterest income, and
  • Variable or contingent consideration.

Companies should also consider various contracts, such as licenses or royalty agreements, collaborative agreements, contracts that change throughout the term, long-term (more than one year) contracts and long-term construction contracts.

  1. The implementation plan

We recommend that a company develop and implement a plan to adopt the new guidance. Due to the breadth and scale of the new revenue standard and depending on the size of the company, this plan may span a year or more. The following key activities should generally be included in the implementation plan:

  • Understand the impact of the new standard on current accounting policies, reporting and disclosure requirements.
  • Consider external resources to assist in developing and/or executing the implementation plan.
  • Determine if any technology solutions may be needed based on current organizational and IT environment.
  • Develop processes, procedures and controls to address the new requirements.
  • Train and develop internal resources.
  • Educate financial statement users about the changes expected within the financial statements

No time to lose

By now, private companies and not-for-profit organizations should have begun to develop a plan for implementing the new revenue recognition standard. Please contact us to see how our firm can provide assistance with your company’s implementation process.

For additional information, go to:

AICPA: Revenue Recognition Resource Page https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/revenuerecognition.html

AICPA: Financial Reporting Brief: Roadmap to Understanding the New Revenue Recognition Standards (September 2016) https://www.aicpa.org/content/dam/aicpa/interestareas/frc/accountingfinancialreporting/revenuerecognition/downloadabledocuments/frc-brief-revenue-recognition.pdf