Your Wake-Up Call on New Revenue Recognition Standard Has Arrived
By Ryan Siebel, Partner, Assurance Services
All companies – public and private – must comply with the Financial Accounting Standards Board’s (FASB) new revenue recognition standard. While public entities are well underway in adopting the new standard in advance of the effective date, the time to act for private companies has now arrived.
The new revenue recognition model, issued as FASB ASU 2014-09 with subsequent amendments, is based on converged guidance with international standards on recognizing revenue in contracts with customers. It 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 FASB’s guidance is effective in 2019 for annual reporting periods, and in 2020 for interim periods. While this gives private companies a bit more time before they have to report under the new standard, it’s highly advisable to use that time productively. In that spirit, Kim Kushmerick, Associate Director, Accounting Standards – Public Accounting, Association of International Certified Professional Accountants (AICPA), recently recommended a three-pronged next-step approach for private companies in a guest AICPA.org blog:
- 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 are applicable 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 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?
- 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 changes are needed 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.