This Insights was contributed by Sandy Crumrine, CPA, CIA, an audit partner at Earney & Company, L.L.P.
One of the Financial Accounting Standards Board’s (FASB) most impactful revisions to accounting standards in recent years will go into effect Jan. 1, 2018 for public companies and Jan. 1, 2019 for private companies.
Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) was 12 years in the making, and it affects all entities – public, private and not-for-profit. The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
FASB suggests completing the following steps to achieve the core principle of Topic 606, all which require varying levels of judgment:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price
- Recognize revenue when or as the entity satisfies a performance obligation
The new standard does away with the industry-specific, rules-based guidance under which U.S. companies have prepared financial statements in the past and implements a new principles-based standard. The goal is to promote comparability across industries, but switching to a principles-based approach will require a lot more judgement on the part of financial statement preparers.
Depending on the industry and the company, the level of change required to comply with the new standard is substantial. Implementation may require an organization-wide examination of impacts, an updating of internal control procedures, and a lot of new disclosures. It will also require careful planning and execution, as well as sound judgment from management.
Be cautious about delaying your implementation efforts. Revenue impacts key analytical ratios and bottom-line earnings. Companies cannot afford to get the accounting wrong.
Here are some ways to gain comfort as you implement the new standard:
- Connect with others in your industry to discuss and arrive at a consensus on difficult areas of judgment in the standard that are common within your industry.
- Consult sources of information such as the AICPA’s Revenue Recognition – Audit and Accounting Guide which includes the observations of 16 industry groups working through implementation issues specific to their respective industries.
- Discuss principles-based judgments with your accountant or auditor, or reach out to FASB’s technical hotline.
- Document your judgments as you proceed with implementation.Careful consideration of your company’s facts and circumstances is needed. Initially, at least, it will be necessary for companies to clearly articulate the basis for their accounting under the new standard. Detailed documentation will support conclusions reached and judgements made.
In addition to changing some of the fundamental concepts of accounting for many companies, the new standard requires extensive new disclosures intended to help investors and other interested parties get a better understanding of a company’s financial position. Companies are warned to be mindful of disclosure requirements while working through the technical accounting issues of the new standard. Even if your revenue recognition does not change under the new standard, your disclosures will change and there may be data that you need to extract from accounting systems that you did not have to before.
Financial statement preparers also have to choose between two methods of adoption – the full retrospective method or the modified retrospective method. Companies that expect significant changes as a result of the new standard may want to adopt the full retrospective approach to provide financial statement uses with comparable historical information. For companies that do not expect significant change in their revenue recognition, adopting the modified retrospective approach will save time and cost.
For everyone who will play a part in the implementation of FASB’s new Revenue Recognition standard, the best advice is to communicate with other stakeholders at every opportunity. There will be a learning curve for all involved and frequent, open communication will help ensure a successful implementation.
Chad Wouters, CPA joined Earney & Company in December 2006 and became the tax partner in November 2013. With an emphasis on strategy and planning, Chad works with his clients all year to ensure the most efficient tax strategies are put into place. Earney & Company, L.L.P. is a CPA firm that handles tax compliance, consulting and planning as well as audit and other assurance services. For more information please visit www.earneynet.com or call (910) 256-9995. Chad can also be reached at [email protected].