Update: Revenue Recognition Changes Deferred One Year
September 15, 2014
Note: This article, originally published September 2014 has been updated to reflect a FASB notification issued March 2015.
Word has gotten around that the rules for revenue recognition are changing; the dust has settled a bit on the announcement, if not on its ramifications. And while implementation might seem distant — the new revenue recognition standard takes effect for non-public entities for annual reporting periods beginning after December 15, 2018* — we at Smith and Howard believe that it is not too early for businesses to begin preparation for the changes. According to Michael Cohn, Editor-in-Chief of Accounting Today (April 2, 2015), “In terms of an early adoption provision, FASB decided to permit both public and nonpublic entities to adopt the new revenue standard early, but not before the original public entity effective date (that is, annual periods beginning after Dec. 15, 2016). A public entity would apply the new revenue standard to all interim reporting periods within the year of adoption. A nonpublic entity would not be required to apply the new revenue standard in interim periods within the year of adoption.”
A clearer picture
In May 2014 the Financial Accounting Standards Board (FASB) and International Accounting Standards Board issued converged guidance on recognizing revenue in contracts with customers. The new standard addresses one of the most important measures that stakeholders use when assessing a company’s current performance and future potential. According to FASB, their joint objective was to establish the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers.
Because the new standard applies revenue recognition consistently across the U.S. and other countries, it marks the most significant rule change aligning U.S. GAAP with international standards. It applies to virtually all companies following either U.S. GAAP or International Financial Reporting Standards (IFRS) and reflects this core principle: “Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services.”
In a broad before-and-after comparison, FASB describes how its Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, will change U.S. GAAP. Most noteworthy from our standpoint is that it eliminates industry-specific revenue guidance. Under the new rules, companies will report the same total amount of revenue over time as they would have previously; however, their performance could look very different as a result of changes in the timing of revenue recognition.
Heads-up for certain industries
Both public and non-public companies need to begin assessing the new requirements’ impact on financial reporting. Companies in certain industries are expected to feel the changes more than others. Smith and Howard is already honing in on our clients who are most likely to be affected, especially those in technology and construction. Other industries likely to experience significant changes include real estate, telecommunications, aerospace and asset management.
Under the new standard, when a company satisfies a performance obligation over time, it must recognize revenue over time. Therefore companies that include multiple deliverables in a sale, or “something with an attachment” — an example is computer software plus a maintenance agreement — will benefit from developing some familiarity with the new guidelines. So will companies that enter into contracts with variable payment terms.
The new standard might influence accounting for revenue recognition in U.S. companies by affecting:
More broadly, because the new rules expand disclosure requirements, some companies will need to capture new data. They might need to look at their computer systems that track the progress of jobs or products, or to write their contracts differently. And they will need to consider the internal controls necessary to ensure complete and accurate information. The new standard also might affect income tax reporting and related financial reporting for income taxes.
Yes, you have time. But it’s not too early to begin the process of gauging how changes to revenue recognition might impact your business, and planning a measured approach to implementing necessary changes well in advance of the effective date.
FASB continues to provide resources that address questions about the new standard; in fact, the change in the estimated implementation date is reflective of concerns from constituents. Smith and Howard is already at work helping clients determine if it affects them. The next steps are to help each client evaluate processes and controls; and to inventory the new information the standard requires as well as the most efficient and effective sources for it. This approach will help our clients make any required systems changes as cost-effectively as possible. The earlier we work through this together, the better our chances of not having to “fix” something down the road.
What can you do? Call J. Sean Spitzer, Partner, at 404-874-6244 to begin the conversation.
*Original planned date was December 2017.
If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.CONTACT AN ADVISOR
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