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Nonpublic entities should begin preparing for a new way to record and account for revenue, which becomes effective after December 15, 2016.

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Nonpublic Entities: Start Prepping for the Revenue Recognition Standard

  • 1/28/2015

It makes little sense for similar revenue transactions to be accounted for differently based on the industry or country where the company resides.

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) agree, and after years of thoughtful consideration, it issued converged guidance to significantly reduce these differences. In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) to provide a framework to improve revenue recognition guidance, reduce inconsistencies, and add more robust disclosure requirements.

These changes, although needed, will have a significant impact on policies, processes, and systems for your organization.

We polled our audience during a recent webinar on the topic, and 95 percent of respondents say they are just getting started or are beginning to gain an understanding of the rules. This is not surprising since the new standard is still being defined and is not effective for private companies for some time.

However, for nonpublic entities, the standard becomes effective for annual periods beginning after December 15, 2016, which means you should begin your implementation plan in 2015 to ensure you will be able to apply the provisions of this standard when they becomes effective. Nonpublic organizations should consider the following implementation plan:

Implementation Timeline for Nonpublic Entities
2014 – 2015
  • Designate a champion to understand the changes to current GAAP
  • Monitor guidance and resources
  • Identify types of contracts and accounting considerations
2015 – 2016
  • Begin evaluating the contracts you identified in 2014 – 2015
  • Design systems to capture information to comply with standard
2016 – 2017
  • Run parallel systems to identify issues
2017 – 2018
  • Implement standard

The modified retrospective pathway

While there are two main choices in how to go about transitioning to the new standard, more than half of our webinar respondents felt that a modified retrospective method would be the most relevant. This method allows an organization to apply the revenue recognition standard at the date of initial application, versus retrospectively applying to each period presented.

This would impact the comparability of financial statements, but would reduce the amount of effort to address restatement of prior year amounts. It requires a cumulative effect adjustment and disclosure of financial statement line items affected in the current period and explanation of reasons for significant changes.

Whether you choose the full retrospective method or the modified version, remember that either method is a change in accounting principles.

How we can help

Changes to revenue recognition can be intimidating. Watch the recording of our webinar to learn more. CLA can help you understand how these changes impact your organization, so that you can adapt to these standards and embrace the changes with confidence.