The sweeping new revenue recognition standard goes into effect soon, but many companies are behind on implementing it. Whether your company is public or private, you cannot afford to delay the implementation process any longer.
Five steps
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, requires companies following U.S. Generally Accepted Accounting Principles (GAAP) to use a principles-based approach for recognizing revenues from long-term contracts. Under the new guidance, companies must follow five steps when deciding how and when to recognize revenues:
- Identify a contract with a customer.
- Separate the contract’s commitments.
- Determine the transaction price.
- Allocate a price to each promise.
- 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, the new guidance will result in earlier revenue recognition than in current practice. This is because the new standard will require companies to estimate the effects of sales incentives, discounts, and warranties.
Changes coming
The new standard goes into effect for public companies next year. Private companies have a one-year reprieve.
The breadth of change that will be experienced from the new standard depends on the industry. Companies that currently follow specific industry-based guidance, such as software, real estate, asset management, and wireless carrier companies, will feel the biggest changes. Nearly all companies will be affected by the expanded disclosure requirements.
Some companies that have already started the implementation process have found that it is more challenging than they initially expected, especially if the company issues comparative statements. Reporting comparative results in accordance with the new standard requires a two-year head start to make sure all of the relevant data is accurately collected.
Reasons for procrastination
Why are so many companies dragging their feet? Reasons may include:
- Lack of funding or staff
- Challenges interpreting the standard’s technical requirements
- Difficulty collecting data
Many companies remain uncertain on how to prepare their accounting systems and recordkeeping to accommodate the changes, even though the Financial Accounting Standards Board has issued several amendments to help clarify the guidance. In addition, the American Institute of CPAs’ Financial Reporting Executive Committee has published industry-specific interpretive guidance to address specific implementation issues related to the revenue recognition standard.
Got contracts?
We have already helped other companies start the implementation process, and we are ready to help get you up to speed, too. Contact us for questions on how the new revenue recognition standard will impact your financial statements and accounting systems.