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Time Is Ticking — Are You Ready for the New Revenue Recognition Standard?
The new revenue recognition standard, ASU 2014-09 (Topic 606), will take effect as early as January 1, 2018, for public entities and January 1, 2019, for other organizations. These dates are quickly approaching, and there are activities that need to be underway well in advance for an effective implementation. It is critical to start taking action now.
It is also important to confirm which effective date applies to your organization. The definition of a “public entity” includes more than just public businesses. For example, nonprofit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market are included. Employee benefit plans that file or furnish financial statements with the SEC are also included in the definition of public entity. These organizations may have to adopt the new standard sooner than they may have originally thought.
New standard may affect functional areas of your organization
Thinking that there is still a lot of time before the effective date, many companies have not started an implementation plan. But because the standard challenges more than accounting and financial reporting, implementation can be a significant undertaking. Even if no major changes are anticipated to your existing revenue recognition, the new rule may still affect functional areas of your organization such as marketing, human resources, pricing, and legal. The standard could potentially impact every company’s accounting process and the way customer contracts are executed, so controllers and CFOs should take action now to understand how it may affect internal controls, systems, and financial reporting processes, and to evaluate transition options.
Get started with assessment and implementation
This principles-based standard replaces all existing guidance under current U.S. Generally Accepted Accounting Principles (GAAP) and requires different judgments and estimates, along with a significant amount of additional financial statement disclosures. The new framework is based on the core principle that revenue should only be recorded when goods or services have been transferred to a customer at the agreed-upon price, and when the customer can use or benefit from the goods or services provided.
There are five steps that must be used in evaluating contracts to apply this core principle:
- Identify contracts
- Identify performance obligations
- Determine transaction prices
- Allocate transaction prices to performance obligations
- Recognize revenue obligations
Get familiar with the new five-step approach and the new definitions. Read the standard and discuss it with your peers, members of your industry associations, and your auditors. As you evaluate the changes, consider how your accounting judgments will compare to your peers’ and competitors’ — it is important to be consistent.
Conduct an overall impact assessment
Evaluate whether your revenues are likely to change based on your contract language, products and services offered, and industry accounting practices. Also consider whether you offer customer incentives, rebates, financing, or warranties, and whether your contract pricing includes variable or contingent consideration — all of which could impact revenue recognition. Your management team should be involved in a preliminary assessment of high-level impacts, such as required changes to contracts and pricing, information technology, and personnel, and should evaluate the company’s culture and tone at the top for managing change. Then you should involve functional areas other than accounting and finance that are part of the sales process. Document the impact assessment along the way, including significant judgments and estimates.
Begin an implementation project plan
You may need to modify existing processes and systems for revenue (and cost) data to accommodate new accounting and disclosure requirements, which could require substantial time prior to the adoption date. In addition, internal controls will need to be designed, documented, and tested.
The amount of time required to successfully implement will vary for each organization based on a number of variables. These include the products and services offered, existing revenue streams, the number and complexity of customer contracts, processes and systems used to gather sales data and report it across the organization, and the resources (internal and outside) available. Additionally, this standard will result in more changes for certain industries than others. It may affect operational and performance metrics, and your key company stakeholders (i.e., boards, investors, and lenders) may need to be informed of the changes. Once an implementation plan is developed, it will need to be modified and monitored over time.
Assess available resources that understand your company’s revenues and can work on implementation, and consider training these individuals, if needed. Discuss if there is a need to include third-party consultants and vendors as part of the overall plan.
How we can help
As the effective date approaches, immediate preparation is imperative. If you haven’t planned for these changes, don’t waste any time going forward. Whether you need help identifying where to start, or are looking for assistance with the detailed steps of implementation, we have studied the new standard’s principles in depth and understand how it will impact organizations in a variety of different industries. Our industry-specialized professionals offer tailored accounting and advisory services to help you implement the requirements with confidence and make the transition to the new standard as smooth as possible.