We realize you’re busy, but that doesn’t mean you can keep hitting the snooze button on the Financial Accounting Standards Board’s (FASB) accounting standards that will soon come into effect for everyone. The accounting standard that needs your attention right now is the new revenue recognition model, issued as FASB ASU 2014-09 with subsequent amendments.
Public entities are well underway with adoption of the new revenue recognition standard, as the new guidance is effective for interim and annual periods in 2018. Private companies still have some time as the guidance is effective in 2019 for annual reporting periods, and in 2020 for interim periods. This is a wakeup call, and not an opportunity to hit the snooze button
It’s important to remember this guidance supersedes the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and most industry-specific revenue recognition guidance. Additionally, it also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts.
To help you get started here are several key things to remember:
Make a Plan
Identify who in your company will become experts and take the lead on understanding and
implementing the new revenue recognition standard. Keep in mind there are implications for tax, internal audit, sales operations, IT, legal and human resources. Check out the AICPA’s updated learning and implementation plan and tax brief.
Focus on areas with increased judgement
The new revenue recognition standard has lots of new estimates and related disclosures. To evaluate the impact to your company, it’s important to focus on areas of the revenue recognition model with increased judgment and determine if these areas are applicable to your contracts. Some things to think about when reviewing your contracts:
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 the 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?
If your contracts contain any of these types of activities, it’s important to dig deeper into the accounting guidance to make sure you fully understand any potential changes to your revenue recognition.
Even if your contracts don’t have any areas with increased judgment, you still need to review the required disclosures and determine what the new requirements are. You can then determine if you will need to make any changes in the level of tracking information due to lower aggregation. This could also require changes to your information technology that are always better to identify sooner rather than later.
For information on the standard and to access valuable tools, visit the AICPA’s revenue recognition webpage.
Once you dive into revenue recognition, why not also start getting up to speed on other new accounting standards coming down the pike by looking at these other AICPA webpages:
The standard has the potential to affect every entity’s financial reporting. The core principle of the new leases standard is that lessees should recognize assets and liabilities arising from all leases, except for leases with a lease term of 12 months or less. This will significantly gross-up many entities balance sheets. Public entities are required to adopt the new leases standard for reporting periods beginning after December 15, 2018. Nonpublic entities have an extra year to adopt, and early adoption is permitted.
Accounting for Credit Losses: FASB ASU 2016-13: Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The standard applies to financial assets at amortized cost, including loans, reinsurance and trade receivables, HTM debt securities, impairment model for available-for-sale debt securities, net investment in leases and certain off-balance sheet credit exposures, such as loan commitments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This allows for more forward-looking information to be considered when developing a best estimate.
So go ahead and dive into these standards now. Your future self will be glad you did.