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The final revenue recognition countdown
Steve Pope, CPA
I hope I am not disappointing anyone, but this is an article focused on revenue recognition, and not a historic synopsis of the hit single from the Black Eyed Peas. Now that we got that out of the way…
After what seems to be many years of FUD, pontificating and theorizing, NOW is the time to start implementing the new revenue recognition standard. For a long time, FASC 606 has been the talk of the town by many, including yours truly. FASC 606 has also accelerated the retirement plans of some of the more experienced CPAs who just don’t feel like dealing with the headache of implementing such a broad, sweeping change. Everyone has read the countless articles on the now infamous “5 Steps.” Some may have even read the actual FASB, but that feat most likely only resides amongst the ultimate of nerdy accountants. The time, though, truly is now that private companies start the implementation process. Here is a practical approach on how you can get started.
The first step of the implementation process is the initial assessment. All companies should start determining what the actual impact of implementing the new standard will have on their financial statements. A step-by- step approach of this assessment should include the following:
- Identify and classify the contracts by the various revenue streams. Categorizing each revenue stream will enable you to establish pools of similar contracts for the initial assessment.
- Evaluate a sample of contracts within each revenue stream using the five steps outlined in the new guidance.
- Assess the impact that implementation will have on each category of contracts.
- Project the findings of each sample to the population of contracts to estimate your company’s overall global impact of implementing the new standard.
Now that you have done the initial assessment, you should have a reasonable handle on what you are dealing with. Keep your fingers crossed that as you do your initial assessment of each revenue stream, you find that each pool of contracts has similar characteristics. If that is the case, and you can reasonably expect that applying the new standard to a group of contracts will be comparable to a contract-by-contract approach, you qualify for the practical expedient. Unfortunately, if this is not the case, you are stuck with the contract-by-contract approach. This approach will certainly take some time, so focus your attention on the revenue streams that you have determined will consume the most resources based on your initial assessment.
Systems + controls
The next step in the implementation process is evaluating and updating your systems and controls. They are an essential element to the contract evaluation process, and these need to be designed, functioning and vetted before the end of your fiscal year. Your initial assessment and contract review will help you identify what these controls need to be. Keep in mind, these are needed to capture the information not only used in the evaluation of your contracts, but also information needed to document and substantiate your conclusions. Trust me, your auditors will be impressed.
Whether you are adopting the Full Retrospective Method or the Modified Retrospective Method, you will need to evaluate 2018 contracts and their impact on your 2019 financial statements when the new standard is officially adopted. Do yourself a favor and start the implementation process now. No matter how large or small the actual impact of adopting the new standard will have on your GAAP revenue, there is a lot of work that needs to be done. Wishing or hoping that you can simply apply a top side entry to your 2019 results will be a very costly mistake.
“It’s the job that’s never started that takes the longest to finish.” ~ J.R.R. Tolkien
Need help implementing the new standard? Contact your Henry+Horne professional advisor. You can also download our revenue recognition e-Book for more industry specific information and implementation guidance.