Will the New Revenue Recognition Standard Affect Your Reported Income?August 18, 2014
Find out if your reported income will change under the new standard.
The Financial Accounting Standards Board recently issued its long-awaited standard on revenue from contracts with customers. Now many companies are wondering, “will my reported income change under the new standard?” The answer depends largely on the nature of your revenues.
A Single Standard
Starting in 2017 for calendar-year public companies and 2018 for calendar-year private companies, the new guidance eliminates most of the transaction- and industry-specific rules on reporting revenue. Instead, all companies must apply a single, principles-based standard that merges Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards.
Every company will be affected to some extent. The new guidance calls for expanded footnote disclosures to give lenders and investors more information about how the company operates. For example, companies may need to break down revenues by product lines or geographic regions. Companies that engage in simple point-of-sale transactions probably won’t experience any other changes beyond expanded disclosures.
Companies that enter into more complicated contracts crossing year end or multiple years — especially those that bundle products and services or involve contingent elements like discounts, warranties or performance bonuses — are likely to experience significant changes in how and when they report revenues. Often the changes will result in earlier revenue recognition than provided under existing guidance, which could also cause companies to owe taxes earlier than in the past. In cases where tax law differs from GAAP, the new standard could create significant book-tax differences and deferred taxes related to revenue recognition.
Industries likely to feel the biggest impact from the new standard include:
- Engineering and Construction
- Real Estate
- Pharmaceutical and Life Science Licensors
- Asset Management
- Utilities, Oil and Gas
The American Institute of Certified Public Accountants has already formed 16 industry task forces to provide practical guidance to help companies report revenues under the new standard.
We are following these developments closely. Contact us for more details on the potential impact to your company.
Read our related blog on how software companies impacted by new revenue recognition rules.