New Revenue Recognition Standard: Are You Ready?

Sweeping new revenue recognition requirements go into effect this year for private companies that follow U.S. generally accepted accounting principles (GAAP). However, many CFOs and controllers companies still have considerable work to do before they can comply. If you haven’t yet started implementing the necessary changes, it’s time to get moving.

Public companies share lessons learned

For a year now, public companies have had to follow the new standard — Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606). Many of those companies found that, even if the new accounting didn’t radically change the number they reported in the top line of their income statements, it changed the method by which they had to calculate it. They had to comb through contracts and offer paper trails to back up their estimates to auditors. Public companies largely reported that the standard was more work than they anticipated. Private companies can expect the same challenges.

Private companies who follow GAAP must start following this new rule the first time they issue financial statements in 2019. For those with an early fiscal year end or issuing quarterly statements, that could be within the next few months. Other private companies have until the end of the year or even early 2020. No matter what, it’s crunch time.

What changes?

The revenue recognition standard erases reams of industry-specific revenue guidance in U.S. GAAP, replacing it all with this five-step revenue recognition model:

  1. Identify contracts with a customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations
  5. Recognize revenue as the entity satisfies a performance obligation

In many cases, the revenue a company reports under the new guidance won’t differ much from what it reported under old rules. But the timing of those revenues may be affected, particularly for long-term, multi-part arrangements. Companies also must assess:

  • The extent by which payments could vary due to such terms as bonuses, discounts, rebates and refunds
  • The extent that collected payments from customers is “probable” and won’t result in a significant reversal in the future
  • The time value of money to determine the transaction price

The result is a process that offers fewer bright-line rules and more judgment calls compared to old U.S. GAAP.

Wondering where to start?

Weaver’s accountants can help you take advantage of best practices learned from companies who have already implemented the new revenue recognition standard — and avoid a fire drill right before your deadline. Contact us for help getting your revenue reporting systems, processes and policies up to speed.

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