By Jim Wong, CPA | January 21, 2015


How prepared are you for the impending impact of the new revenue recognition standard?

On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) finalized a joint effort to provide guidance towards recognizing revenue in contracts with customers. This new guidance was created in hopes of improving financial reporting and disclosing a broader scope of revenue. As a result, the FASB and IASB believe revenue will be more consistently recognized, globally, across all markets.

This is the most significant standard developed in the last five years. Across all standards, the Revenue Recognition Standard is the most far-reaching and is transforming revenue recognition from rule-based to principle-based. Therefore, companies are dedicating significant resources to prepare themselves for this standard to take effect.

Recently, CFO.com hosted a webinar, Is Your Business Prepared for the Impact of the New Revenue Recognition Standard? to help explain the importance of the new revenue recognition standard and identify what you can do in advance to get ready.

Below are five categories the webinar covered to better explain what the new revenue recognition standard means for your company.

Understand the Five-Step model.

The new revenue recognition standard is meant to be a single source of guidance, worldwide, to help make disclosures coincide with management decisions. The Five-Step model is the basis to achieve this. It includes:

  1. Identifying the contract with a customer.
  2. Identifying the performance obligations in the contract.
  3. Determining the transaction price.
  4. Allocating the transaction price.
  5. Recognizing revenue when or as the entity satisfies a performance obligation.

 

Each step has to be recognized before moving on to the next step. The process is more circular than linear.

Know the timeline.

  • The Revenue Recognition Standard goes into effect for public entities for annual reporting periods beginning after Dec. 15, 2016. Public entities are not allowed to start this process any sooner.
  • The Revenue Recognition Standard goes into effect for private companies for periods beginning after Dec. 15, 2017. Private companies may choose to start this process sooner, if desired.

And although it seems a long way out, for companies that report three years of financials, the new standard would then require restatement of all comparable periods included in reported financial statements. A taskforce has been formed to decide whether to extend the abovementioned dates.

Consider all areas that will be impacted.

The new revenue recognition standard impacts entire businesses, not just the accounting and finance function. Therefore, it’s important to collaborate cross-functionally to come up with a proper plan of action. Be sure to include representatives from various departments including Information Technology, Operations, Engineering, Sales, and even outside stakeholders and boards. The impact is forecasted to be so great that business models may change and modes of distribution of services may change, as a result.

Understand how this may complicate sales processes.

Revenue was defined on the CFO.com webinar as, “The transfer of goods or services to customers in amounts that reflect the consideration to which the company expects in exchange for those goods or services. Or, a one-stop shop to recognize revenue.” Therefore, various circumstances may make it more tedious to determine revenue. For instance: Services that are bundled, discounts, returns, shipping, software implementations, and other complexities. You should take a look at what is customary for your business and understand what the performance obligation is for each situation.

Non-public companies’ revenue recognition policy is limited to a specific statement i.e., “We recognize when this or that happens.” Also, it’s important to consider right of return, warranties, and determine how you’re going to process these variables.

Steps Accounting and Finance leaders should take to know their team is ready to go.

The CFO.com webinar offered the following 8 Steps for CFOs, and other accounting and finance leaders, to consider when preparing their team and the rest of the company for the upcoming new Revenue Recognition Standard:

  1. Understand the standard
  2. Create a project team
  3. Identify gaps
  4. Build a timeline
  5. Consider business practices
  6. Consider tax implications
  7. Consider technology needs
  8. Determine a transition approach

What are some other ways Accounting and Finance Leaders, and businesses as a whole, can prepare for the impact of the new Revenue Recognition Standard? Comment below and let us know!


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