New Revenue Recognition Standards are Upon Us
Background on the Standard and Upcoming Deadlines
In May of 2014, when the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update that significantly revised the accounting rules Companies must follow pertaining to Revenue Recognition from Contracts with Customers, the implementation dates seemed far away. These deadlines are now upon us, as many public companies this month are completing the first year to which these standards apply. Most private companies are about to enter the first applicable year.
This comprehensive new “principles based” standard will supersede existing “rules based” revenue recognition guidance (including legacy industry specific guidance) and requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods and services.
Adoption of the new rules will affect the timing of revenue recognition for certain transactions. The new guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of all prior years presented, and one requiring retrospective application with a cumulative effect of adoption at the date of initial adoption of the new standard with disclosure of results under old standards.
What’s Happening Now, and Financial Reporting Risks
SEC reporting entities have seen increased costs, both internal and external, in assessing their contracts with customers, applying the new rules, and implementing new policies and procedures to adhere to the Standard.
Some public companies have completed their assessments, and have had recent press releases highlighting the expected changes to their financial results (for example, in a July 28, 2017 filing, Amazon issued guidance regarding an expected change to its revenue recognition for gift cards and electronic devices sold through retailers, among others). Many other companies have been silent and are actively scrambling to assess their contracts and revenue accounting to meet the impending deadline. Risks of waiting too long include increased costs and the possibility that a significant deficiency or material weakness in internal controls might be reported by auditors for inadequately implementing the new standard.
U.S. Equity markets are expecting revenue, reporting, and earnings volatility as a result of the new standard, and time will tell what delays, deficiencies in controls or reporting, or other issues are experienced and reported as the standard becomes effective.
What Should You be Doing Now as a Private Business or Not-for-Profit who has Contracts with Customers
Successful and seamless implementation of this standard, and one that minimizes time expended and fees, requires up front planning and good communication internally amongst members of your accounting team, concurrently with your external professional accounting advisor/auditor.
As a first step, ensuring that records and files containing customer contracts and specifics on terms of sales are accurate and complete is necessary. Understanding the nuances of your product and service deliverables, guarantees, warranties, incentives, and other unique terms of sale are critical to applying the new guidance.
Technical expertise in applying the new standards is also needed. Depending on the size of your business and the skillset of your accounting department, some of the upfront assessments might be done internally, with good communication throughout the process and agreement or concurrence on application of the new rules and your accounting treatment with your external auditors. If revenue recognition and an understanding of contractual legal and accounting terms and topics is not a skillset of your existing team, involvement of a specialist, third party, and most importantly your accounting advisor/auditor early in the process is a must.
Thinking about which approach to adopt (either full retrospective, which will result in a restatement of all prior year results that were affected by the new standard, or the less costly and time-consuming modified retrospective approach, which may result in the recognition of previous deferred revenue through retained earnings) is also a topic that should be discussed.
If you have any questions regarding implementation of the new accounting standards, please contact Al Duhaime at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.