Private companies that have not yet adopted the new revenue recognition standard still have some time, but the clock is running. The effective date for adopting the new rules for how an entity recognizes revenue from customer contracts is in effect for annual reporting periods. However, for private companies with a calendar year-end, there is still a small window of opportunity to put the new procedures in place.
The new model, issued as FASB ASU 2014-09, with subsequent amendments, is intended to establish a principles-based approach to report and disclose useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue from such contracts. The new rules base the standard on converged guidance with international standards.
So, if your business has some ground to cover toward implementing the new standard, Kim Kushmerick, Associate Director, Accounting Standards – Public Accounting, Association of International Certified Professional Accountants (AICPA), offers the following three-step approach for companies in her recent guest AICPA.org article:
- Identify individuals in your business who can be go-to subject matter experts on the new standard.
- Focus on parts of the revenue recognition model with increased judgment and determine if these areas apply to your contracts. Issues to consider when reviewing your contracts include:
- What type of consideration is included, and is there any variable consideration?
- Do you normally provide implicit price concessions or incentives?
- Do you provide loyalty programs, including tier status?
- Do the promises in the contract contain significant integration?
- Does it contain termination for convenience clauses?
- Are there generally multiple contract modifications?
- Are there options for customers to purchase additional products?
- Is there a renewal option?
- Does it contain a license?
- Do you normally account for contracts as a group, as opposed to on an individual basis?
- Does it contain a financing component?
- Review the required disclosures. It’s imperative to review required disclosures and determine what the new requirements are—even if your contracts don’t have areas with increased judgment. Based on that, you can determine if you need to make changes in the level of tracking information as a result of lower aggregation. Additionally, this could necessitate information technology (IT) changes—and like any IT decision, it’s best to identify issues as far upstream as possible.
Two final points to keep in mind with regard to this issue:
- The updated guidance supersedes revenue recognition requirements in FASB ASC 605, Revenue Recognition, as well as most revenue recognition guidance that is industry- specific. It also supersedes selected cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts.
- The FASB has also released its new leasing and credit loss standards, which will become effective for private companies for the 2020 and 2021 calendar years, respectively. Adoption of these standards will have their own time-consuming demands.
Questions about the new revenue recognition standard, or other accounting and auditing issues? Contact Jason Cope, CPA, at 214-635-2508 or fill in the contact form below.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.