With the new revenue recognition standards in the pipeline, you’ve likely been thinking about them if you follow U.S. generally accepted accounting principles (GAAP), but haven’t done anything to start preparing. Given revenue is one of the most important financial metrics for a company these changes will have far-reaching impact on your business and shouldn’t be taken lightly. Although we are nearly two years out from the 2019 calendar year-end effective date for non-public companies, the complexity of implementation requires you to devote your attention to it now.
When the new revenue standard was originally unveiled by the Financial Accounting Standards Board (FASB) in 2014, it was designed to eliminate inconsistencies and weaknesses in existing standards. Simply put, it established a new “core principle” for recognizing revenue.
An important change in the requirement is to identify separate performance obligations in contracts. Performance obligations are promises to transfer goods or services, and a company should treat each promised good or service (or bundle of goods or services) as a performance obligation to the extent it is distinct. This means the customer can benefit from it, either on its own or together with other readily available resources, and it’s separately identifiable in the contract.
Once performance obligations are identified, a company must determine whether these obligations are satisfied over time or at a point in time, and recognize revenue accordingly. The new standard represents a shift to a principles-based approach, so it will require greater judgment on the part of management.
While 2019 seems far away, the clock is already ticking. The new standards won’t just impact companies at a financial-statement level, but also at an operational level – which only complicates matters.
Given the significant planning, training and process changes that will need to take place, there is no time to waste. Although the prospect of preparing for the new standards can be daunting, Doeren Mayhew has compiled a list of things that can help you prepare. Start tackling these things today and you should be in good shape by the looming effective date.
Determine the nature and extent of required disclosures: The new standard requires additional financial statement disclosures, both quantitative and qualitative, regarding revenues. In addition, upon adoption, companies must make disclosures regarding the impact of the new standard. Make sure your systems are equipped to collect the data you’ll need for these disclosures.
Evaluate your accounting policies, business processes, information technology systems and internal controls: Are they equipped to collect the information you’ll need to comply with the new standard? Suppose, for example, that you currently track information by contract. If the new standard requires you to separate contracts into discrete performance obligations, or to bundle several contracts together, it may be necessary to update your policies, processes and systems to collect the information you need. In addition, there will likely be impacts to the internal controls over financial reporting that will require updating current documentation and involve controls testing. Disclosures about the anticipated effect of the new standard on a company’s financial position and results of operations may be necessary.
Consider the impact on customer relationships: You may want to revisit the way products and services are bundled and priced, or restructure your contracts with customers, to better align your business practices with the way you recognize revenue.
Look into how other aspects of your business might be affected: For example, changes in the way you recognize revenue may affect your tax planning strategies or debt covenants with lenders. They may also cause you to adjust compensation plans that are tied to revenue. And consider addressing public company disclosures. Companies may want to get an early start in disclosing the methods they will use to implement the new revenue standard and the impact the standard will have on their internal control over financial reporting.
Develop an action plan: After taking into consideration everything, develop a implementation project plan to follow and help keep the team on track.
There was a reason FASB opted to delay the standard implementation – complex implementation challenges. The amount of work required to prepare for the impending changes will likely be more time consuming than you think. Despite the two-year gap until the effective date, it’s important to start planning now.
For example, if you adopt the new standard under the retrospective transition method on Jan. 1, 2019, you’ll need to collect data for 2017 and 2018, which is much easier to do along the way then work backwards.
If you have questions related to the new revenue standards and how to implement it effectively, rely on the advisors at Doeren Mayhew to help provide clarity. Contact us today.
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