The accounting for revenue recognition will be changing with the issuance of Accounting Standards Codification (ASC) 606 by the Financial Accounting Standards Board (FASB). The deadline for implementing the new revenue recognition standard is December 15, 2018 for nonpublic entities. This means financial statements for reporting year December 31, 2019 must comply with the new standard.
These deadlines may appear far away, but it’s critical to start preparing now. The new standard has the potential to impact organizations far beyond their financial statements, affecting information systems, business processes, compensation, and other contractual agreements as well.
Why the Change?
One of the primary objectives for the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) was for the new standard to consistently report revenue, regardless of the company’s industry or the capital markets accessed. Revenue is one of the most important measures used by investors in assessing a company’s performance, and currently, different industries use different accounting methods for economically similar transactions.
The new standard improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.
How Does the New Standard Differ?
The core principle is that an entity will recognize revenue at an amount that reflects the consideration to which it expects to be entitled in exchange for transferring goods or services to a customer. In other words, the new revenue recognition standard expects an entity to recognize revenue when the customer can use or benefit from the goods or services provided. For example, a company has a contract to provide $50,000 of consulting services over the next 12 months. If the company provided $5,000 of consulting work to the client in December 2016, it should recognize that revenue in December 2016. The revenue is recognized in December because the client benefitted from the services provided in December.
Specifically, the new standard requires you to follow a five-step process:
- Identify contract(s) with a customer
- Identify the separate performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the separate performance obligations.
- Recognize revenue when the entity satisfies each performance obligation.
The new guidance requires entities to make new judgments and estimates (e.g., estimating variable consideration and standalone selling price) and provide expanded disclosures about revenue. Private companies will also have to apply the new cost guidance in ASC 340-40 when they adopt the standard.
Because these steps involve considerable judgment, it is critical that you collaborate with your accounting professional from the beginning.
Who Is Affected?
The new standard will impact all entities that render services based on contracts and have multiple deliverables. However, it may have significant ramifications for businesses serving these industries:
- Aerospace & Defense
- Engineering & Construction
- Entertainment & Media
- Pharmaceuticals & Life Sciences
We’ll be glad to help you review the particulars of your situation to determine the extent to which you’ll be affected.
Why Start Now?
When faced with such sweeping changes, it can be tempting to put things off, but remember—the FASB had a good reason to provide a generous transition timeline. It takes time to implement any complex overhaul of current practices, and the sooner you get started, the better.
Starting now will also allow ample time for us to discover any advantageous tax strategies, resolve issues smoothly, and deliver peace of mind before the deadline. We will communicate with you often to ensure a smooth transition.
Why Choose Us?
Our revenue recognition team is led by Tom Beisner, CPA, Partner. We have already helped clients implement the new revenue recognition standard and are prepared to help you.
Contact us to schedule a complimentary consultation today 417-881-0145.