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Be Prepared for New Revenue Recognition Rules

The Boy Scouts of America’s motto is “Always Be Prepared!”  A useful reminder for not only scouts, but when it comes to implementing new accounting rules such as revenue recognition.

We Are Done

After eight long years of development, exposure drafts, roundtables, comment letters, redeliberation and rewrite, the Financial Accounting Standards Board (FASB) finally issued its final rules in May 2014 (Topic 606:  Revenue from Contracts with Customers).  The FASB and its international counterpart, the International Accounting Standards Board (IASB)’s successful achieved its ambitious plan to create a single set of revenue recognition rules.  Prior to issuance of Topic 606, the United States had its revenue recognition guidance scattered in over 200 plus pieces of literature.

What Were They Thinking

The hard work now begins as preparers, users, and auditors continue the process of understanding the 700 pages in the new standard.  For many businesses, the new rules may not result in significant changes in the way in which revenue is reported.  However, for some, the changes will be significant in the amounts and timing of how revenue is recognized.  The new standard may also introduce new estimates which were not required under current US GAAP.  One significant change which will likely impact all businesses involves the level of disclosure required.   The FASB and IASB attempted to address a long standing complaint that financial statements generally contained “boilerplate” disclosures in one of the most significant areas in any business – revenue recognition.  Like any change to accounting rules, the FASB attempted to consider the spectrum of implementation issues; however, as to be expected, it is simply not possible to address everything.  So already, the American Institute of Certified Public Accountants has already formed a revenue recognition transition working group to debate implementation issues.  It will take time before  we truly understand if practice reflects what the standard setters intended.

Always Be Prepared

Based on feedback in the drafting process, the FASB elected to provide public companies time to digest and implement the new rules.  For calendar year companies, the new rules become effective for Q1 2017.  This is a lot of time, right?  The answer may be no.  The new rules have two transition methods including a retrospective method.  The retrospective transition method may require a public company to apply the new standard for fiscal years 2017, 2016 and 2015.  Still have time, right?  Well, may be not.  The five year selected financial data table would also require the new rules to be applied for fiscal 2014 and 2013. This means that contracts which are executed today or performance obligations satisfied today or tomorrow may need to be accounted for under the new standard.

It may be appropriate to begin planning for adoption now.  Not only may the new rules result in changes in the amount, timing and disclosures related to revenue recognition, but there may be system implications in how to capture the necessary information to comply or internal control modifications necessary to address new or modified risks.  Accounting personnel will need to be trained as well as stakeholders such as board members, creditors, and perhaps analysts.  It may be appropriate to perform dual analysis of customer contracts – under current GAAP as well as new rules – and to refresh financial models. There is time until the effective date, but it may be appropriate to start planning now and live the Boy Scout Motto of Always Be Prepared.

Final Standard – Revenue from Contracts With Customers

This entry was posted on Friday, August 15th, 2014 at 3:36 am and is filed under Accounting Standards, Revenue Recognition. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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