Revenue Recognition Standards – Are You Ready?

Revenue Recognition Alarm

One of the broadest changes to US (and international) accounting GAAP is upon us. The new Revenue Recognition requirements (FASB/ASC 606 & IFRS 15) take effect as soon as January 2018 for calendar year-end public companies, and January 2019 for all others (Non-Public/Not for Profit). Sound the alarm because this is a big deal.

 

Are you ready?

FASB and IASB took more than 2½ years to refine and finalize requirements from the initial release in 2014 to the last (or sixth) ASU in December 2016; which should give some indication of just how revolutionary and complicated these changes are.

 

Broad Scope of the new GAAP

Revenue is a central and universal measure of business performance. The new requirements are sweeping in their scope, and apply to all businesses and sales.

All businesses – All types of organizations are impacted; whether public or private, for profit or not.

Global – Harmonized standards impact both US and International companies alike (FASB + IASB).

All sales* – Including sales of products, services, licensing/royalty based sales, sales thru agents, distributors and sub-contractors, and some areas not previously considered as a sale.

All types of contracts – Regardless of the form of contract whether explicit or implied, verbal or written.

*excluding some financial services addressed elsewhere thru GAAP

 

Complex Requirements and New Concepts

The standards introduce a new way of measuring revenue driven by broad based concepts and performance against underlying sales contracts.

Complex –Covering the broad nature of all types of sales, including licensing centric transfer of intellectual property and internet/technology based services. It includes activities not previously considered (or treated) as sales.

Concepts based – A move away from prior prescriptive rule based requirements to a concepts based approach requiring interpretation and strong process design to drive operating consistency.

Contract centered – driven by elements of a sales contract focusing on the underlying performance obligation of the seller and benefits delivered to the customer.

New Accounting Unit – The driver of revenue recognition is the new concept of performance obligation which is linked to the benefit to be delivered under the contract. Related to this are the transaction price and how they are valued and allocated to performance obligations to recognize revenue.

 

Industry Impact

The impact of the accounting change may vary across industries, and even within industries based on the specific nature of sales and sales contracts in place. Each company must evaluate the impact for their own circumstances and implement accordingly.

 

Impact Across the Organization

While Accounting is obviously central to the change – the impact to the organization can be broader than might first be expected. Some other operating areas to consider in the transition include:

FP&A – Adjusting financial operating plans for the impact of the new recognition requirements.

Treasury – Changes to the timing and value of revenue reported may require changes to existing debt covenants to ensure compliance.

HR/Compensation – Changes to revenue reported may require changes to executive compensation plans that use financial accounting revenue measures for their performance goals.

Legal – Existing contracts may require interpretation and standard contract language may need to be adjusted to avoid ambiguity (in accounting treatment) and to drive consistency.

Information Technology – Accounting changes will likely require transactional and operational changes to systems; or at a minimum updated internal reporting and analysis, to support adoption of the new GAAP.

 

Initial Steps

When starting the project there are a number of initial steps to plan for.

Determine the impact to your current sales mix. Whether the impact is found to be a little or a lot – the accounting change must be implemented. The estimated impact will drive your approach.

Build an enterprise wide implementation team (accounting, IT and other…). Ensure management awareness and buy-in of the project and the availability of appropriate resources.

Select the reporting (transition) presentation and define requirements. The ASU provides for different methods of presentation requiring more or less detail. And don’t forget data needs of the many reporting disclosures associated with the change and ongoing reporting.

Design transitional processes for data collection, transaction processing and reporting. Your approach in the transition may be driven by spreadsheets or may consider substantial changes to your ERP system. Plan appropriately.

 

Resources

The AICPA has produced a number of industry specific guidance and project implementation aids. See: https://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/revenuerecognition/

 

How We Can Help

There are a number of ways we can help with your move to the new GAAP; whether it is supplementing your project team or providing subject matter guidance…

  • Assist in the impact evaluation of the new requirement.
  • Formalize and refine new/changed operating policies and procedures.
  • Help define requirements and design transitional operating processes and controls.
  • Move from interim or transitional processes to long-term managed solutions.