Five Key Issues for Revenue Recognition Implementation
Accounting changes for the new revenue recognition standards (ASC 606) for contracts with customers will be required sooner than you think. While the majority of companies have started analyzing the impact of the new standard, few have taken the next steps toward implementation. Is your company ready to implement these complex changes?
The experts have weighed in and identified five key challenges that should be considered to ensure a smooth transition.
1. Understand the differences between the new standard versus the old.
Contract accounting under the old standards required that revenue be recognized based on the estimated completion percentage at a given time on the contract. The new standard requires a five-step approach.
1. Identify the contracts with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) the entity satisfied a performance obligation.
2. Effective dates and method of the transition.
Public business entities, certain nonprofit entities and certain employee benefit plans should apply the changes for annual reporting periods beginning after December 15, 2017 (2018). All other entities, including private businesses, should apply the changes for annual reporting periods beginning after December 15, 2018 (2019). HOWEVER, the transition guidance gives the option of a full retrospective or modified retrospective approach to implementation. This means that when private businesses implement the revenue recognition changes for the 2019 reporting year, 2018 revenue will need to be adjusted to reflect the new standards, as well. Changes should be considered for the 2018 reporting year for private businesses to lessen the burden of accounting in 2019.
3. Operational and accounting challenges.
The most significant operational and accounting changes likely to be seen with the new revenue recognition standards include:
- Recognition of revenue at a specific point in time vs. over time.
- Combination of multiple contracts into one under certain conditions.
- Accounting methods for variable consideration (such as performance bonuses) and contract modifications (such as change orders).
- Allocation of contract price to multiple performance obligations (design-build contracts for example).
- Capitalization of costs to obtain contracts.
- Accounting for uninstalled materials.
4. Accounting software changes.
Most current contract accounting software is designed to account for revenue recognition on contracts with customers based on percentage-of-completion standards. It is important that accounting software be evaluated for applicability with the new standards. This may require consultation with your software provider and accountant to ensure that your system is custom-tailored for your business’s specific contract types to allow for proper adaptation to the new revenue recognition standards.
5. Financial statement presentation and disclosure changes.
If you currently have financial statements prepared under generally accepted accounting principles (GAAP), you are likely accustomed to seeing certain specific contract disclosures and financial statement presentation. Under the new revenue recognition standards, there are broad-sweeping modifications to financial statement presentation as well as several new disclosures and enhancements that come along with it. It is important that you act now to address the potential impact that the new revenue recognition accounting standards will have on your business. Don’t wait or it may end up costing you significant time and resources to catch up later!
Working with a provider that understands the standard and the potential ripple effect it could have on the various components of your operations may expedite the transition process. For more information or to request assistance with your revenue recognition implementation, contact Ben Sumner, CPA, at 315-472-9127 or email email@example.com.