Revenue Recognition & Leases: 10 Things Private Companies and Not-for-Profits Should Be Doing
Private companies and nonprofits alike are getting ready for the recently issued and upcoming revenue recognition and lease accounting and reporting standards
When significant new revenue recognition and lease accounting and reporting standards were issued a few years back, implementation dates for private companies and not-for-profit entities seemed a long way into the future. Time has passed quickly, and preparing for these pronouncements should be a top priority. Below are 10 things your organization should be considering or performing now to prepare for the pronouncements to ensure no surprises, and a seamless implementation of these complex new accounting standards.
The Facts – Implementation Dates for Calendar Year-end Private Companies and Not-for-Profit Organizations:
|Revenue Recognition Standard||2019|
|Lease Accounting Standard||2020 (now more likely 2021)*|
* At a July 17, 2019 FASB meeting, it was recommended to delay the implementation date of this pronouncement for private companies and not-for-profit organizations one year. This most likely will be finalized and official after a required 30 day comment period passes.
Three Things to be Doing Now to Prepare for Both the Revenue Recognition and Lease Accounting Standards:
- Identify responsible parties to oversee implementation of these pronouncements, set appropriate goals and timetables, and develop a system of accountability and track progress towards implementation. Identifying employees with the skillset and assigning responsibility to implement these pronouncements should be a top priority. Developing an internal checklist with important milestones such as data gathering, testing, concurrence from professional advisors, transaction processing, new internal controls, and reporting requirements makes good sense. Well organized and detailed plans that are championed by the right people will reduce the risk of audit findings, reporting delays, and additional costs.
- Evaluate your information technology systems and resources to ensure appropriate capture, tracking, summarizing, and reporting of data. The accounting journal entries, necessary summary reports, and data for footnote disclosure required for these standards is different than in the past. Ensuring your IT systems can handle the changes, and designing programs to meet your specific needs should be assessed.
- Ensure good and up-front communication with lenders and other users of your financial statements. These standards (especially the lease standard) most likely will have a large impact on your balance sheet and financial ratios, and could impact your compliance with debt covenants. Having a clear understanding of how your covenants work, and if needed discussing the changes, clarifying, and communicating with your lenders in the near-term will help ensure no surprises upon implementation.
Four Things you Should be Doing Specific to the Revenue Recognition Standard:
- Ensure that records and files containing customer contracts and specifics on terms of your product or service sales are accurate and complete. This is an important first step in the process.
- Review your contracts with customers to fully understand the nuances of your product and service deliverables. Items such as guarantees, warranties, incentives, and other unique terms of sale are critical to applying the new guidance, and should be clearly understood.
- Consider other items impacted by the new pronouncement, such as contract acquisition costs, fulfillment, and sales commissions. The accounting for items such as these may be different under the new standard, and the accounting should be understood and evaluated.
- Determine which adoption approach to use. There are two options, (either full retrospective, which most likely will be more time consuming, and will result in a restatement of all prior year results that were affected by the new standard, or the less costly and more efficient modified retrospective approach, which may result in the recognition of previous deferred revenue through retained earnings) that should be decided.
Three Things You Should be Doing Specific to the Lease Accounting Standard
- Complete a full inventory of your lease agreements. Ensure you are able to produce a summary schedule of relevant information pertaining to all of your leases. This schedule should include important data such as lease inception dates and terms (duration, monthly payments, end of term options, etc.).
- If you are a lessor, carefully review your agreements, terms, and the new pronouncement and its practical expedients. Evaluation of several items, such as costs paid directly by lessees, variable payment terms, changes in facts, and lease and non-lease components of a contract are important items to identify and evaluate.
- If you are a lessee, obtain an understanding of the pronouncement, and consider how to best implement its numerous transition provisions, multiple policy elections, and practical expedients. There are many paths forward and elections to make when implementing this pronouncement. This should be something you are beginning to understand and complete.
Good planning and immediate action will help to ensure you and your organization are ready for these pronouncements well in advance of when it’s a critical need. There are many variables and specific considerations for each that may impact your accounting and reporting. Our audit team is here to help our clients navigate through the requirements and challenges they present. If you have questions or would like to discuss these matters further, contact Al Duhaime or your BNN advisor at 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.