Accounting standards are constantly evolving, with new ones issued from the Financial Accounting Standards Board (FASB) every year. Many times, they have no impact to most private companies. However, the FASB’s new revenue recognition standard is expected to have one of the most far-reaching impacts seen in quite some time. Even if it doesn’t change how your company recognizes revenue, you will be required to provide enhanced disclosures over revenue recognition.
The new standard eliminates all industry-specific revenue recognition guidance. It covers all entities whose financial statements are presented in accordance with U.S. generally accepted accounting principles, so your company will soon need to follow this five-step approach:
- Step 1: Identify customer contracts
- Step 2: Identify performance obligations
- Step 3: Determine the transaction price
- Step 4: Allocate the transaction price to performance obligations
- Step 5: Recognize revenue when, or as, performance obligations are satisfied
While this may seem easy, the specifics behind each of these steps are very detailed and may introduce more judgment than what was seen under current revenue recognition guidance. Furthermore, post-issuance updates have been made to the original revenue recognition accounting standard update, meaning this is still changing.
As it relates to recognizing revenue, not all contracts with customers are going to be impacted by the new standard. If you have contracts with the following features or terms, these are likely going to require additional analysis for potential changes in revenue recognition:
- Contracts that include variable consideration
- Contracts that provide the customer with both a good and a service (or multiple goods and/or services)
- Contracts that give customers a warranty or an option to purchase additional goods and services
- Contracts that involve a refund or return, a repurchase feature, a license, a consignment or bill-and-hold terms
Resources for you
The effective date for private companies is annual reporting periods beginning after December 15, 2018. However, you will want to get an early start on determining the effects of the new standard, especially if your company presents comparative financial statements.
We’ve put together an e-Book to provide guidance so you can make this important accounting change in your business. Click here to download it.
Jonathan Poppel, CPA