Are you ready for the new Revenue Recognition Standard?
May 22, 2017
By Steve Campana, CPA, ABV, CFF®
Contractors, manufacturers, retailers and more will have a lot to consider over the next several months when it comes to how they manage their revenue due to the new Financial Accounting Standards Board’s (FASB) revenue recognition standards, Topic 606, Revenue from Contracts with Customers. Each of the five steps in the new standards have key details which will need attention as the industries affected by these changes move through their implementation. However, it is first important to develop an understanding of the overall key components, effective dates and possible options moving forward with these standards.
Introduction and Effective Dates:
The standard was issued in May 2014 and subsequently amended for various provisions. Public companies will need to comply with the new standard starting with annual reporting periods beginning after Dec. 15, 2017, and nonpublic companies will need to comply with annual reporting periods beginning after December 15, 2018. Early adoption of the standard is permitted.
The FASB’s goals regarding the new standard are:
- Common revenue standard for all industries, jurisdictions, and capital markets
- Condense 100+ United States Generally Accepted Accounting Principles (GAAP) standards into a single standard
Prior to the new standard, the construction industry for example had, for all practical purposes, carved out a special niche regarding the recognition of revenue under two primary guidelines:
- AICPA Accounting Research Bulletin (ARB) No. 45, Long-Term Construction-Type Contracts, (1955) and
- AICPA Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (1981)
At the highest altitude, the new standard requires companies to recognize revenue:
- When promised goods or services are transferred to customers
- In the amount of consideration to which the company expects to be entitled
To do this, the new standard outlines a five-step process:
Step 1. Identify the contract(s) with the customer
Step 2. Identify the separate performance obligations in the contract
Step 3. Determine the transaction price
Step 4. Allocate the transaction price to the separate performance obligations in the contract
Step 5. Recognize revenue when (or as) the entity satisfies the performance obligation
At the current time, it appears contractors may have at least four choices regarding the new standard.
1. Fully comply and issue comparative financial statements for both years ended December 31, 2018 and 2019.
2. Fully comply and issue single-year financial statements for the year ended December 31, 2019.
3. Elect the “Alternative Transition Method” which allows an entity to apply the new guidance only to contracts not completed under legacy GAAP at the date of initial application and recognize a cumulative catch-up adjustment to the opening balance of retained earnings in the year of initial application. Additional disclosures would also be required in the initial year of adoption.
4. Adopt an alternative financial reporting framework (e.g., FRF for SMEs, tax basis, etc.) that does not involve adoption of the new FASB standard. This choice involves a careful consideration of the reporting needs of the organization and the users of the financials (e.g., lenders, sureties, etc.). Multiple frameworks are available.
Industries impacted by these changes, and the users of their financial statements, should work with their CPA to navigate the complexities of this implementation process.
For more information or assistance on preparing for the new revenue recognition standard, call 888-556-0123, email email@example.com or submit our online form.