Accounting On Us
New revenue recognition standards
How to get your company ready
Jonathan Poppel, CPA
Accounting standards are always evolving, with new standards issued every year by the Financial Accounting Standards Board (FASB). Many times, these standards have no impact on a large number of nonpublic companies. However, FASB’s new accounting standard for revenue recognition is expected to have one of the most far-reaching impacts in quite some time. Even if the new standard doesn’t change how your company recognizes revenue, companies will be required to provide enhanced disclosures over revenue recognition.
Why the change?
FASB wants one set of rules that apply for all companies, especially for comparability, instead of the industry specific guidance we have right now. These new standards align the revenue recognition timing with the delivery of goods and the performance of services that may be embedded in the contract.
What is changing?
The new standard eliminates all the industry-specific revenue recognition guidance. All companies will soon need to follow this five-step approach for recognizing and measuring revenue:
- Identify customer contracts
- Identify performance obligations
- Determine the transaction price
- Allocate the transaction price to performance obligations
- Recognize revenue when, or as, performance obligations are satisfied
As the new standard covers all entities whose financial statements are presented in accordance with U.S. generally accepted accounting principles, those entities will now need to demonstrate that revenue is recognized in accordance with this new five-step approach. 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. Post-issuance updates have been made to the original revenue recognition update, meaning this new accounting standard is still changing.
Will my company see any benefits?
Some companies might recognize revenue earlier as a result of the new standards. For example, a contract for a product to a customer where that product has no alternative use. In this situation, you could end up recognizing revenue throughout the manufacturing period. Furthermore, contracts that include multiple deliverables may allow for revenue to be recognized for the performance obligations associated with those deliverables earlier in the revenue cycle.
When does this take effect?
While the effective date for nonpublic companies is not until annual reporting periods beginning after December 15, 2018, you will want to get an early start on determining the effects of the new standard, especially if your company presents comparative financial statements.
What should I do now?
Many business owners are going to see this as a big headache and could end up defaulting to say, “I’m not going to be impacted by this.” But really, there’s no way to tell until you go through all your customer contracts and see if there’s anything that needs to be done differently. These new standards may have an overarching impact on your financial statements. If you have audited financial statements and you don’t comply, your auditor will likely have an adverse opinion on your financial statements, which basically states to the users that the financial statements cannot be relied upon. Therefore, it is imperative that you start considering the potential effects of the new guidance that will be applicable. If you need help getting started complying with the new standards, be sure to reach out to Henry+Horne.