Is Your Company Ready to Implement the New Revenue Recognition Standards?
The time is near. The new revenue recognition standard (Topic 606), which vastly changes the revenue recognition model for contractors, is on the horizon for private companies and many have yet to evaluate the impact that the new rules could have on their company’s financial statements.
At its core, Topic 606 breaks down the revenue recognition standard for contracts with customers into a five-step model that must be taken into consideration when accounting for each and every contract. Each step in the model has its own challenges and intricacies that can affect the way that revenue is recognized on those contracts.
The five steps are as follows:
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies the performance obligation(s)
Public business entities, certain not-for-profit entities, and certain employee benefit plans are required to 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.
Many public entities have already gone through the process of implementing the changes for Topic 606 and have identified many challenges with implementation. It is highly recommended that companies develop an effective action plan for implementation which should include the following key considerations:
- Assign internal company staff or create a task force to assess the impact in the following areas:
- Financial reporting
- Internal audit
- Contract accounting/job costing/project management
2. Evaluate the impact on contract accounting. There are several valuable resources available through FASB, AICPA, CFMA, CICPAC to aid in this evaluation.
3. Determine the impact of adoption on financial results and different adoption methods:
- Full retrospective approach
- Modified retrospective approach
- How new disclosure requirements will affect your company’s financial statements
4. Discuss with and educate key stakeholders:
- Board of Directors/Audit Committee
- Other contractors (GC’s and Subcontractors)
5. Evaluate changes to IT systems that may be necessary to keep track of the following information:
- Variable consideration
- Multiple performance obligations
- Documentation of the processes
- Impact at adoption on open contracts
- Qualitative and quantitative disclosures
6. Document the project plan and timeline for implementation.
Implementation deadlines are fast approaching. Every company that has contracts with its customers will be affected in one way or another as a result of the new revenue recognition standard in Topic 606. It is important that you begin preparing NOW to address the impact on your company. Contact Benjamin A. Sumner, CPA, with any questions you may have regarding implementation of Topic 606.