Finally, after years of debate, writing, and re-writing, it’s here. The new revenue recognition standard, formally known as ASC 606, has arrived. Public companies were up first and adopted the standard on January 1, 2018. Private companies get until January 1, 2019 to address the issue but should not delay in getting ready.
Good news – the public companies have paved the way. Bad news – it’s not easy. You should not take this lightly, as the public companies will attest, because the process can almost take on a life of its own. You will need to closely analyze nearly every aspect of your customer contracts, which can take more time than expected.
It all started about a decade ago when the standard setters in the US met with their international counterparts to get a little closer. The results of the convergence effort yielded a new standard for recognizing revenue, which means US companies need to think more in terms of principles than the old rules mindset. The standard impacts all industries, including those that followed specific guidance for their industry such as software, real estate, and construction. The current US guidance could sometimes produce a different treatment for similar arrangements, all depending on the company’s industry. In some cases, the changes under the new standard may be slight and impact only the timing and pattern of the accounting. In other cases, the changes will be significant and require management to do careful, thoughtful planning. Even if the accounting is relatively unaffected, the new disclosure requirements are much more enhanced than current guidance dictates.
You’re probably thinking the big question, which is……so what? Isn’t revenue a pretty simple concept? In theory, yes, but in practice it gets complicated. The existing guidance consists of a labyrinth of rules that generate confusion, whereas the new guidance introduces a few key principles. The main principle is that a company should recognize revenue when goods/services are transferred to the customer in an amount that is consistent with the consideration to which the vendor expects to be entitled. In essence, revenue is recognized when control over the goods/services are transferred to the customer. The point of view of the customer is key.
Simple enough, right? This is where it gets fun with additional guidance involving:
- What is a contract?
- Are there financing components?
- Any variable consideration?
- Any non-cash consideration?
- What is the timing of delivery/control transfer?
- What are the performance obligations?
- Should multiple contracts be aggregated?
- How is price allocated?
The implications of this are far-reaching, as nearly every aspect of operations, sales, and finance will be impacted. Not only do finance and accounting personnel need to understand the new standard, but an enterprise-wide effort is needed. Sales and operations professionals may inadvertently create accounting ramifications with knowing it, simply because they don’t understand the impacts of their decisions. The most thoughtful and proactive companies are engaging ALL areas in a detailed education of the new standard, which prevents misunderstandings and confusion down the road.
All companies need to address internal controls, IT systems, and process documentation as a result of the new standard. Merely thinking of this as “an accounting problem” is short-sighted. Holistic and comprehensive in the early stages will prevent chaos and confusion later.
Your ultimate goal is the success of your business, and the accounting should be a means to that end. The new standard is meant to simplify matters for you, although the transition will be challenging. As you work through these complexities, make sure you have a proven, trusted professional at your side.
Questions? Contact Mike Buher at firstname.lastname@example.org