This past May when the Financial Accounting Standards Board issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers, the first question which came to mind for many business owners and finance professionals was “How will the new standard affect us?”
Unfortunately answering this question using broad generalities is difficult to do. Some organizations may not see much of a change outside of enhanced disclosures, while others will experience more drastic effects requiring system and process changes.
The new guidance will affect any entity that enters into contracts with customers to transfer goods or services (unless those contracts are within the scope of other standards, for example insurance contracts or lease contracts).
The new standard is intended to remove inconsistencies in existing U.S. GAAP and improve comparability of revenue recognition practices across entities and industries. Certain organizations may be challenged when replacing previously prescriptive rules with more of a principles based approach, which will require an initial and ongoing assessment of contracts, products and services under the following five step methodology.
Step 1 – Identify the contract(s) with a customer.
Step 2 – Identify the performance obligations in the contract.
Step 3 – Determine the transaction price.
Step 4 – Allocate the transaction price to the performance obligations in the contract.
Step 5 – Recognize revenue when (or as) the entity satisfies a performance obligation.
Elements which introduce complexity when applying the five step process include the existence of goods or services that are highly dependent on or highly interrelated with other goods or services, variable consideration, financing, and noncash consideration, just to name a few.
Business owners and finance professionals should start having conversations with their professional advisors to begin their assessment. A general framework of your organization’s assessment may entail:
- The identification all key revenue streams
- Assessment of the contracts
- Capturing the relevant data
- Outlining system or process changes as needed
Additionally if the effects of adoption have the possibility of being significant, business owners and finance professionals should also consider creating pro-forma financial statements to facilitate proactive discussions with the users of their financial statements.
The new revenue standard is effective annual reporting periods beginning after December 15, 2017 for privately held companies with retrospective adoption required if comparative financial statements are presented.
If you are interested in learning more about the revenue recognition, contact Adam Collyer or your MarksNelson professional.