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Catching Up on Revenue Recognition

by Laura Hay, CPA, CPE | Jan 04, 2018
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The implementation date for new revenue recognition requirements is rapidly approaching. What should organizations do if they find themselves underprepared?

Since the May 2014 issuance of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), businesses have been assessing its requirements and applicability to their revenue models.

“The standard doesn’t discriminate based upon size or scope of an organization,” noted Nick Lombardo, CPA, audit senior manager at Schneider Downs. “With a year or more before the effective date, some private companies are assuming that the ASU may not apply to their operations, implementation won’t be a ‘big deal,’ or that they can rely upon the auditors for implementation. Ultimately, it’s going to require some work for most, so starting sooner rather than later is strongly encouraged.”

The revenue recognition standard applies to most companies that receive revenue from contracts with customers, including public, private, and not-for-profit entities, with limited exceptions. In implementing the standard, entities need to take the following actions:

  • Identify contracts with customers
  • Identify performance obligations in the contracts
  • Determine transaction prices
  • Allocate transaction prices to performance obligations
  • Recognize revenue when the entity satisfies a performance obligation

The new standard seeks to eliminate variations in the former transaction- and industry-specific revenue guidance in favor of a more principles-based approach to revenue recognition. Entities that have not yet addressed the standard need to begin immediately. What steps should be taken now?

  1. Allocate Resources “Understanding the rules can be time-consuming, and waiting for the audit is too late,” said Lombardo. Companies should determine whether they have sufficient expertise and resources in-house, or if they need to engage a partner to assist them with implementing the new rules. If a company decides to undertake the implementation internally, they need to ensure they understand the standard thoroughly.
  2. Assess Applicability Organizations need to quantify their revenue streams and types of contracts to which the standard applies.
  3. Develop an Implementation Plan A project plan should be in place up-front, including milestones and timelines for implementation. For the organization that’s unsure where to start, identifying a good partner might be most critical in the planning, rather than implementation phase.
  4. Identify Requirements for Data & Technology With more robust disclosure requirements, companies need to ensure that required data elements are being gathered and systems are in place to provide the necessary reporting.
  5. Establish Documentation & Controls With more requirements for estimates and management judgments in the standard, organizations need to determine how they will assess, document, and establish go-forward controls so that the rationale for judgments is captured, consistent, and auditable. Determine whether accounting policy changes are necessary and develop contract management processes to reduce risks.
  6. Evaluate Impact on Other Areas of the Business Evaluate whether changes in revenue recognition impact existing contracts, metrics, commissions, or compensation plans. Ensure that corporate governance and external stakeholders are informed as appropriate.

CHALLENGES

Lombardo noted that some of the more frequent implementation challenges entities are experiencing include:

  • Collecting the necessary data needed for the new disclosures.
  • Assuming incorrectly that the standard doesn’t apply to certain environments, like not-for-profit, or a certain revenue stream of the organization that is presumed to be too insignificant. While that may be true, the auditors will need to see documentation of that assessment.
  • Involving all relevant departments in the organization, including contract administration and tax.
  • Finding the right resources, whether internal or external.
  • Recognizing that internal resources need to obtain sufficient training to accept management responsibility for the changes.

“Obtaining the training up-front to learn what everything in phase 1 means, dedicating the right resources, and having a well-thought-out project plan will prevent problems down the road that could have costly impact,” Lombardo said.

EFFECTIVE DATE

The Standard is effective for public organization annual and interim reporting periods beginning after Dec. 15, 2017. For non-public organizations, the effective date is for annual reporting periods beginning after Dec. 15, 2018 and interim periods beginning after Dec. 15, 2019. Early application is permitted, but not prior to the original public organization effective date (Dec. 15, 2016). Entities may elect full retrospective adoption, with the requirements applied to all prior reporting periods presented, or modified retrospective (cumulative effect at date of adoption) with additional disclosures of the impact in the year of adoption.

Laura Hay headshotLaura Hay, CPA, CAE, is Executive Vice President of the Ohio Society of CPAs. She can be contacted at lhay@ohiocpa.com.

This article was reprinted with permission from the Ohio Society of CPAs, and appeared in the winter 2018 issue of the WashingtonCPA Magazine. Read more here.

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