December 07, 2015
New Revenue Recognition Rules - Applicable Sooner Than You Think!
By Ted Lucas, Director - Assurance Services
Will your company be subject to the new revenue recognition rules that take effect in 2017 and 2018? If so, are you operating under the assumption that you still have a nice chunk of time to prepare? Think again -- the rules are applicable sooner than you think!
According to the Financial Accounting Standard Board's (FASB) accounting standards updates issued in May 2014 and August 2015, the amended revenue standards for public entities are effective for annual reporting periods beginning after December 15, 2017. For all other entities, the amendments in these updates are effective for annual reporting periods beginning after December 15, 2018.
As a result of these updates, for a December 31 calendar year-end, these rules will affect the December 31, 2018 financial statements for public entities and December 31, 2019 financial statements for all other entities.
Looking ahead to how to account for the new standards may seem like a task best left till after your 2015 financial statements are completed. But it's this line of thinking that is going to get most CFOs and controllers behind the eight ball.
FASB updates are applicable either prospectively or retrospectively. If prospectively, an update would apply in the year it becomes effective and every year going forward. The new FASB revenue update is applicable retrospectively. This means that starting with the 2018 financial statements for public entities and the 2019 financial statements for all other entities, every year presented in the financial statements will need to conform to the amendments.
In 2018, for public entities that are accelerated filers, the financial statements must include a statement of operations / income for the previous three years. The earliest required year in that three-year period will be the 2016 financial statements. For other entities with a three-year statement of operations / income, the same rules would apply, although most non-public entities are not required to present a three-year statement of operations / income, but typically present comparative statements.
That being said, public companies will need to apply the amendments to their 2016 financials for inclusion in their 2018 financial statements. That means if companies want to avoid the headache of doing all the work in 2018 to apply the amendments for the prior three years, they really should be preparing now to start keeping a second set of books in accordance with the new guidelines, starting in 2016, so that the transition will be seamless in 2018, when it is required. That day is going to be here a lot faster than you think!
Preparation should include research into how the new amendments will affect your financial reporting, as well as a consultation with your accountant. In most cases, companies will also need to work with their reporting software providers to determine how their systems may need to change and track this information.
Once companies understand how the new rules will affect them, they should begin applying both the new and old rules to financial reporting. That way, when the new rules take effect, all the retrospective changes will already be done. Don't let the new FASB standard snowball into a costly and frustrating project down the road. Act now and be prepared.