The much-anticipated new standard for recognizing revenue goes into effect in 2019 for non-public companies. That time-frame may lull management into believing they have ample room to tackle the issue. However, feedback from early adopters suggests it takes far more time to absorb the organizational impact than one might think. Word to the wise: get started now!
Does this impact your company?
Many companies believe the new standard will not impact them because they do not have contracts with customers or because they recognize revenue at the point of sale. However, it is important to understand this standard will apply to all businesses that recognize revenue from customers. A contract by definition is an agreement between two or more parties that creates an enforceable right and obligation, whether verbal or written, and can be as simple as a standard purchase order.
Some believe implementation is not required because the ultimate recognition will be the same under the new standard. This is also misleading, as the standard will require full implementation efforts even if there is no change in the amount of revenue recognized. This will require walking transactions through the five-step model below and drafting the appropriate financial reporting disclosures.
ASC 606 is a Generally Accepted Accounting Principles (GAAP) change that effectively replaces the current revenue recognition standard across all industries and will affect all companies. The standard has changed, and it is the responsibility of your accountant to make sure that you have adopted and implemented the standard. The following steps can help frame your analysis and assist in an assessment of your compliance with the new standard.
Why did the standard change?
For years, GAAP supported different mechanisms for addressing contract sales across industries even though many of the underlying transactions were similar. Disparities also existed between U.S.-based and international corporations. The new revenue recognition standard reflects the combined efforts of the Financial Accounting and Standards Board (FASB) and International Accounting Standards Board (IASB) to establish greater uniformity across industries and nations.
The organizing principle of the new standard dictates that revenue recognition should depict the transfer of goods or services to customers in an amount that reflects the consideration to which they expect to be entitled. Variable consideration – e.g., discounts, rebates, refunds, warranty coverage, customer reward programs – leave open the possibility of payment below the negotiated price and therefore an estimated portion of that revenue stream must be deferred.
To learn more, click the link below to be taken to the original article on the Aldrich website. There, you can learn more about all of the areas of your company that might be impacted by the new revenue recognition standard and what you can do to ensure that your company is prepared for the coming changes.
Thank you to Kellan Davis, CPA and Aldrich CPAs + Advisors LLP for providing this article.