Private companies that follow U.S. Generally Accepted Accounting Principles (GAAP) must comply with the landmark new revenue recognition standard in 2019. Many private company chief financial officers and controllers report that they still have significant work to do to meet the demands of the sweeping rules. If you have not started the implementation process, it is time to start.
Lessons from public company peers
Affected private companies must start following Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606), the first time they issue financial statements in 2019. For private companies with a fiscal year end or issuing quarterly statements under U.S. GAAP, that could be within the next few months. Other private companies have until the end of the year or even early 2020. No matter what, it is crunch time.
Public companies, which had to begin following the standard in 2018, reported that, even if the new accounting did not radically change the number they reported in the top line of their income statements, it changed the method by which they had to calculate it. They had to comb through contracts and offer paper trails to back up their estimates to auditors. Public companies largely reported that the standard was more work than they anticipated. Private companies can expect the same challenges.
The revenue recognition standard erases reams of industry-specific revenue guidance in U.S. GAAP and attempts to come up with the following five-step revenue recognition model for most businesses worldwide:
- Identify the contracts with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- Recognize revenue as the entity satisfies a performance obligation.
In many cases, the revenue a company reports under the new guidance will not differ much from what it reported under old rules, but the timing of when a company can record revenues may be affected, particularly for long-term, multi-part arrangements. Companies also must assess:
- The extent by which payments could vary due to such terms as bonuses, discounts, rebates, and refunds
- The extent that collected payments from customers is ‘probable’ and will not result in a significant reversal in the future
- The time value of money to determine the transaction price.
The result is a process that offers fewer bright-line rules and more judgment calls compared to old U.S. GAAP.
We can help
Our accounting experts can help you avoid a ‘fire drill’ right before your implementation deadline and employ best practices learned from public companies that made the switch in 2018. Contact us for help getting your revenue reporting systems, processes, and policies up to speed.