The following is the first in our series of articles discussing the latest on the Revenue from Contracts with Customers standard, ASU (Accounting Standard Update) No. 2014-09, which was to be adopted by public companies by year end 2018. Our goal is to keep you informed on compliance requirements with one of the largest changes to revenue recognition standards expected to go into full effect for private companies by the end of 2019. We want to take advantage of the additional time available to provide guidance to these companies as the standard is extensive and will likely affect the business’s financial statements and business processes, resulting in significant preparation for compliance. One consideration is that potentially everyone who owns a business will be involved with the process. Additionally, thought should be given to existing contracts and terms, and companies must be ready to decide how to adopt the policy and must meet initial criteria to recognize the revenue.
Steps for Companies to Implement Regarding Revenue
The ASU update has created a five-step process to assist in determining when and how much revenue to recognize. These steps serve a framework of guidance for recognizing the value of revenue and when the revenue is to be recognized. The steps are:
- Identify the contract(s) with a customer
- Identify each performance obligation within the contract
- Determine the transaction price
- Allocate the transaction price to the identified performance obligations
- Recognize revenue when, or as, the performance obligations are satisfied
Standard Implementation Considerations
The standard is extensive, and adoption requires foresight. As companies prepare to adopt the Revenue from Contracts with Customers, information will need to be collected daily from revenue generations. Most likely, all departments in a company will need to be involved in data gathering, from the IT to sales departments. These areas of your business will need to assist in gathering specifics concerning contracts, complying with new disclosure requirements, assessing the impact on employee compensation, and possible modification of terms to existing contracts. These are just a few of the examples of how your business could be impacted. Finally, the standard is principles-based, implicating the necessity of greater judgment.
The standard can be adopted in part or in full, and the entity must disclose the full amount by which each financial statement line item is affected in the current reporting period. These new disclosures and the applications may or may not apply to your company, and they may or may not apply depending on how you implement them: full retrospective or modified retrospective method. To assist you, stable accounting systems and sound guidance need to be in place within your company.
Contact A CPA Today
At Lawhorn CPA Group, we focus on developing ways to impact and revolutionize the industry while better serving our clients. Direction from an accountant regarding the Revenue from Contracts with Customers standard and corresponding disclosures is available. Reach out today via our website or by calling us at 865-212-4867.