Coming Soon! Changes to the Way Borrowers Report Revenues

In Sean Spitzer’s recent article, “Prepare Now for Revenue Recognition Changes,” he provides a clearer picture of the new standard (ASU No. 2014-09, Revenue from Contracts with Customers), describes the new standard’s affect on certain industries and recommends next steps for planning. Below, we outline changes for your borrowers that you should be aware of.

Which borrowers will be affected? 

Companies that engage in simple point-of-sale transactions will see minimal changes to their revenue recognition methods, because the standard primarily targets revenues from complex, long-term contracts. 

Industries expected to feel the biggest impact include software, real estate, asset management and wireless carrier companies. But all types of businesses will be required to disclose more details about their revenues. Expanded footnote disclosures include breakdowns of the borrower’s sale mix by product lines, geographical markets and contract length. This is good news for lenders who are interested in learning more about their borrowers’ products and services. 

When will borrowers report revenues? 

Under the new standard, companies will assign a transaction price to each of a contract’s separate performance obligations and consider whether it’s “probable” they won’t have to make a significant reversal of revenues in the future. They also may need to adjust transaction prices to reflect the time value of money. Most companies that enter into complex, long-term customer contracts are likely to report revenues sooner under the new standard than they currently do, particularly if their contracts include sales incentives, discounts, service provisions and warranties that might qualify as separate performance obligations. Different companies may interpret the “probable” threshold differently, however, threatening financial statement comparability among entities. 

How can borrowers and lenders plan? 

The Financial Accounting Standards Board (FASB) won’t allow companies to implement the new standard early, except for private companies, which may voluntarily implement the standard at the same time as public companies. Companies also can’t prospectively apply the new standard to only contracts entered into after the standard’s effective date. So your borrowers should already be investigating how the new standard will affect today’s revenues, in order to provide comparative statements when the new standard becomes effective. When they submit 2014 statements, ask owners what their revenues would have been under the new revenue recognition standard. This inquiry will let you know who’s on top of the latest accounting rules — and who might benefit from discussing the anticipated effects of this new standard with an accounting professional.

For more information please contact Sean Spitzer at 404-874-6244.