Are you ready for the new revenue recognition standard to go live? For companies in many industries, implementing this standard is likely to be more time-consuming, complex and costly than management expects. Here’s an overview of the changes that are coming soon to your income statement.
A Major Shift
n May 2014, the Financial Accounting Standards Board (FASB) published Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The standard converged the rules for recognizing revenue under U.S. Generally Accepted Accounting Principles (GAAP) with new accounting rules published by the International Accounting Standards Board (IASB).
The FASB’s revenue standard is the result of more than a decade of work with the IASB to produce a single method for companies worldwide to calculate their revenue. It scraps about 180 pieces of business- and transaction-specific guidelines in U.S. GAAP and calls for a principles-based approach. Under the converged standard, companies must follow a five-step procedure for recognizing revenue:
1. Identify a contract with a customer.
2. Separate the contract’s commitments.
3. Determine the transaction price.
4. Allocate a price to each promise.
5. Recognize revenue when or as the company transfers the promised good or service to the customer, depending on the type of contract.
In some cases, this will result in earlier revenue recognition than in current practice, because the new standard will require companies to estimate the effects of sales incentives, discounts and warranties.
Public companies must comply with the new revenue guidance in 2018. Private companies have an extra year for implementation. The standard is expected to create major accounting changes in certain industries, including software and telecommunications. In other sectors, such as retail, the change isn’t expected to be as dramatic. The shift from rules-based accounting to more principles-based guidance also is expected to be a significant cultural shift for U.S. companies and their accountants.
Many companies are struggling with the nitty-gritty details of adopting the landmark revenue recognition rules. If you have questions or concerns about the new guidance, talk to your Armanino professional.
Armanino will be holding a Revenue Recognition Roundtable Breakfast on October 17th, 2017 from 7:30 – 9:30 AM at the JW Marriott Downtown Los Angeles where our audit and consulting experts will identify industry-specific risks as they relate to the new regulations, as well as provide tips for evaluating your preparedness for the changes ahead. Click here to register now. We hope to see you there!