GAIN UNDERSTANDING

REVENUE RECOGNITION

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Estera LeConte, CPA

FASB’s New Revenue Recognition Standard – More Than a Five-Step Process

2017-10-10

FASB’s revenue recognition standard is a major change in accounting and requires any privately held or not-for-profit organizations issuing GAAP financial statements to prepare now for an implementation that can be complex. It will require different levels of involvement from both internal and external stakeholders.

It’s been a little while since FASB and the International Accounting Standards Board (IASB) released the long-awaited new standard on revenue recognition from contracts with customers. The new standard replaces all existing guidance on revenue recognition, including industry-specific rules, with an overarching, principles-based general standard. In order to issue GAAP financial statements by the required implementation date, you need a plan to make sure your financial statements are in accordance with the new GAAP.

Although all industries must follow the same basic five steps in recognizing revenue, there are many industry-specific conditions for interpreting and addressing each step described in the process below. Our BerryDunn experts have created in-depth guidance for organizations in:

For all industries, here are the new steps toward recognizing revenue:

  1. Identify the contract with a customer
  2. Identify the separate performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the separate performance obligations in the contract
  5. Recognize revenue when (or as) the entity satisfies a performance obligation

Understanding the notion of performance obligations, (a new concept in GAAP) and what triggers the satisfaction of performance obligations can be complex. The standard provides comprehensive guidance for transactions such as service revenue, contract modifications and recognizing gains from real estate sales and other nonfinancial assets to non-customers. The standard will require enhanced disclosures in areas viewed as having less than adequate coverage under existing guidance.

Whom will this impact most?

The software, construction, telecommunications, and real estate industries will, in some cases, see significant changes. The new standard affects different industries to differing degrees, so it’s crucial to work with your finance team (and your CPA firm) to understand the implications specific to your industry. It is likely to touch several departments within your organization, from finance and tax planning to contract estimating and management.

Effective dates: Implementation tasks may be closer than they appear

For non-public companies, the standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Earlier application is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

The first reporting period may seem distant enough to call into question the urgency to develop an implementation plan for your organization. Realize, however, that system or contract changes may require long lead times to provide needed and correct information. For example, if a contract includes more than one performance obligation, is your accounting system capable of tracking costs and revenues pertaining to the different performance obligations? If you have significant waste or defective materials in a long-term contract, will you have the internal controls and procedures in place to ensure those costs are identified and tracked separately? You will need all this accomplished much earlier if you choose to restate prior years for comparative purposes under the full retrospective transition method permitted by the new standard.

Communicate and educate

With implementation of the new standard, your organization’s financial statements will look different and revenue — one of the most important line items in the financial statements — might not be comparable to prior years for a variety of reasons (e.g., some revenue may be recognized earlier than in the past, some later). Educating your key financial statement users about the changes and the impact on your financial statements is an important part of your implementation process. Different users or stakeholders may require different types of communication. For example, internal communication may differ significantly from how and what you need to communicate with investors, bankers, sureties and other outside parties.

What should you do right now?

Implementation is going to involve a number of people across the organization. We strongly recommend selecting a leader to:

  • Gather representatives from different departments to be involved in implementing the revenue recognition standard. Depending on how your company is organized, at the very least, you will want to include people from Finance, Accounting, Treasury, Legal/Compliance, IT and Human Resources.
  • Identify and collect all relevant data about your revenue streams: analyze your customer contracts (utilizing the 5 step process) and identify what will change under the new accounting practice.
  • Identify the internal controls and IT systems necessary to implement the identified changes.
  • Develop a roadmap for sequential and parallel actions as well as a timeline to meet the required reporting dates and communication targets. Be sure to allow adequate time for testing the new systems and processes to make sure the transition is smooth.

Remember, your industry may have very specific and unique needs or requirements to implement the new standard successfully. We would be happy to advise you or answer questions specific to your organization.

We’ve provided additional information for some industries or have identified revenue recognition experts for others. Please see the following for white papers, e-books and other material or people who can help you gain control of the new standard:

Many organizations are seizing the change in standards as an opportunity to update or improve certain processes and systems. Please contact Tracy Harding or Estera Ciparyte-McDonald for more information.