Summertime is finally here! But before you hit the beach, head to your clients’ offices and make sure they are ready to adopt the Financial Accounting Standards Board’s (FASB) accounting standard on revenue recognition, issued as FASB ASU 2014-09 with subsequent amendments.
Public companies adopted the new guidance in 2018, and soon private companies will get their turn. The guidance is effective for private entities in 2019 for annual reporting periods, and in 2020 for interim periods.
Here are a few key things to make sure your clients know:
Not just revenue recognition
The revenue recognition standard applies to all revenue streams and also contains new guidance for some costs.
All revenue streams are included: In addition to applying to all entities (public, private, and not-for-profit), the revenue recognition standard also applies to basically all revenue streams. This includes contracts with customers to transfer goods or services, or contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example: leases and insurance contracts).
New guidance for costs to obtain or fulfill a contract: The new revenue recognition standard contains new guidance for accounting for incremental costs of obtaining a contract and costs to fulfill a contract with a customer.
It is important to make sure your clients have a complete implementation plan that captures all revenue streams and includes accounting changes for costs to obtain or fulfill a contract.
Areas with increased judgment
The new revenue recognition standard has lots of new estimates and related disclosures. It is important to make sure your clients determine if these areas are applicable to their contracts. Some things to make sure your clients are looking for when reviewing their 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 the contract 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 the contract contain a license?
Do you normally account for contracts as a group, as opposed to on an individual basis?
Does the contract contain a financing component?
If these types of activities exist in your clients’ contracts, they should dig deeper into the accounting guidance to fully understand any potential changes to revenue recognition.
Lots of disclosures
The new revenue recognition standard requires qualitative and quantitative disclosures to provide a full understanding about contracts with customers. Although the new revenue recognition standard does offer some elections for private companies to not provide specific disclosures, the disclosure requirements are definitely more than under current accounting.
Your clients should get a jump start on this area now. Since public companies have already adopted the new revenue recognition standard, many resources are available to use for examples of the new disclosures such as 10K filings, the Revenue Recognition: AICPA Audit and Accounting Guide, and SEC comment letters and speeches.
It is also important for your clients to determine if any changes in the level of tracking information will be needed due to lower aggregation requirements, and the potential for any changes in information technology.
Do your clients a favor, spend some time with them this summer and make sure they are ready to adopt the new FASB accounting revenue recognition standard. Next winter you will be very happy you did!