New FASB Standard: Revenue Recognition - Are You Ready?March 22, 2018
If you have multi-prong or long-term sales customer contracts, are you ready for the new accounting standard on revenue recognition?
Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, will likely have a significant impact on companies that offer guarantees (other than product or service warranties), or are in the media, machine manufacturing, construction, and software industries.
The standard takes effect for years beginning after December 15, 2017 for public companies (2018) and for years beginning after December 15, 2018 for nonpublic entities (2019). However, nonpublic entities that prefer 2018’s financial statements to reflect the same approach as 2019’s financial statements will want to implement this new standard as soon as possible.
Transitioning to the new revenue recognition standard
Full vs. Modified Retrospective Adoption
There are two adoption methods approved by FASB:
- Full retrospective method – This involves applying the standard retrospectively to all reporting periods presented in the financial statements.
- Modified retrospective method – This involves applying the standard in the year of initial application (prior year’s financial statements are not re-stated).
FASB allows several practical expedients to ease the transition to the new standard.
Fundamentals of the new Revenue Recognition Standard:
Implementing the new standard involves a multi-step process:
- First, you need to identify the contracts with your customers
- Next identify the performance obligations within the contracts (what steps does your company need to perform for the customer in order to get paid?)
- Determine the transaction price
- Allocate the transaction price to each performance obligation within the contract
- Recognize revenue as your company completes each performance obligation
- Account for the discount due to time value of money (what’s the present value of that future customer payment?)
- Account for commissions and other costs to obtain or complete the contract
Disclosure requirements significantly increase to include, among other things:
- Breakdown of revenue to disclose the amount, nature, timing and any uncertainty about revenue and cash flows (for example, major product lines, leasing and sales, geographical region, government or non-government customers, short and long-term customers)
- Customer contract balances (opening and closing balances of contract receivables and related assets and liabilities)
- Remaining performance obligations (how much is remaining to be done for the contract to be completed?)
- Decision-making factors and estimates that were applied in recognizing revenue, receivables and the remaining performance obligations (what were the company’s judgments on how revenue was recognized?)
- Commissions and other costs to obtain or complete the contract (need to be recorded as an asset and spread over the same period as the related revenue)
Implementing the new revenue recognition may be quite challenging and labor intensive for your accounting and sales departments. We recommend that nonpublic companies begin analyzing customer contracts very soon so there are fewer surprises for 2019.
Questions? For questions or information on the revenue recognition standard and for practical ways to make the transition easier, contact us.