In January 2018, the new revenue recognition standard (Update No. 2014-09; ASC 606) takes effect. The standard has broad implications and may affect many parts of your organization: financial statements, business processes, taxes, and internal controls over financial reporting. It requires the collaborative efforts of multiple departments within the company, including financial reporting, IT, sales, tax, investor relations, human resources, and others.
Jointly issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (ISB, the revenue recognition standard will supersede virtually all existing revenue recognition guidance in Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS). The intent of the new standard is to replace the existing guidance with a single industry-neutral revenue recognition model that will reduce complexity and increase financial statement comparability across companies and industries. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance.
One of the best practices being adopted early on is to avoid the “Slippery Slope” of feeling pressure due to lack of sales and going beyond what is acceptable accounting standards when recognizing revenue. Review revenue from contracts with existing customers excludes other income and transaction-specific advice. There are significant disclosures related to the timing of revenue, level of granularity on significant customer contracts, obligations to refunds/returns/defects and why you aren’t recognizing the “downside” upfront.
Below are 9 steps to get you on track to compliance:
- Build an internal team. This team will perform an initial assessment of the impact of the new guidance, communicate the impact and outline the strategy. A properly staffed team should include players from revenue management, IT and each department involved in the quote-to-cash process. If you don’t have in-house revenue management expertise, include your audit firm. The team needs to understand the impact of the new guidance and whether it means you have to change the way you book or sell in order to create better processes from a revenue recognition standpoint.
- Evaluate significant revenue streams. Don’t limit yourself to lines of business or “products and services”.
- Identify, evaluate and summarize contract types. This includes the identification of performance obligations and variable transaction price considerations. Sufficient time should be allowed to identify and analyze contracts to enable efficiency, consistency, and quality across the organization. Templates for gap analysis and contract reviews should capture information for future phases of the transition effort.
- Establish new policy requirements, where appropriate.
- Analyze and determine additional disclosure requirements. Identify how information to support disclosures will be provided.
- Evaluate the impact on periodic financial processes. Identify data gaps and process requirements.
- Design system changes, where needed
- Manage expectations around business planning and analytic reporting. Management and investors should be educated as to the expected impact of the new standard.
- Develop a project plan and roadmap. This should include key activities and milestones, training requirements and a detailed work-plan.
Other key factors to understanding the change:
Principle-Based vs. Rule-Based
- Requires more judgment when allocating transaction price and determining satisfaction of the performance obligation.
- Document reasoning for judgment exercised in recognizing revenue
- Full retrospective – restatement of all periods presented
- Modified approach – opening balance sheet adjustment in the year of adoption
Impact on Taxes:
- Need to involve tax department
- Impact on deferred taxes
- Impact on revenue reporting for tax purposes
- Consider the need to file IRS form 3115