Any new accounting standard can throw us for a loop, but the new revenue recognition standard has made an especially strong impact. Not all revenue-generating activities fall under the purview of the new standard, but the changes are far-reaching and will affect a multitude of revenue streams in almost all industries.
Public organizations should have implemented this new standard on interim reporting periods that began after December 15, 2017, and on their annual reports for fiscal year 2018. Private entities were given more time to make the change, but the new standard is now in effect for all companiesthat issue financial statements in accordance with Financial Accounting Standards Board (FASB) rules.
The lessons public entities learned while implementing the new standard can help private entities with their own adoption strategies this year.
It Was a Bigger Effort than Expected
The changes required to comply may take longer than you think. The process requires an overhaul of how you think about revenue-generating activities. Are these agreements considered customer contracts? Such a simple question may not have a straightforward answer. And answering that question is just the first step. Not only do you have to know which of your existing agreements are considered contracts, but you must also construct a new system that identifies and classifies new contracts. At a minimum, this will require more personnel involvement, and it may also require you to update your accounting software or use IT functions in unique ways.
Good Team Members Make All the Difference
Revenue recognition will require involvement from many different departments. Public entities learned how influential these changes were in their organizations and how many staff members they would impact. Assemble a team you trust, from all corners of the office, and get them on board with the changes.
This team might include:
- Accounting staff, to collect and analyze data for the new disclosures.
- Sales managers, to break down each contract into its separate performance obligations.
- Legal advisors, to revise existing contracts.
- IT staff, to alter how systems work together.
- Operational managers, to employ new internal controls.
Disclosures Are Not Simple
Private companies have fewer disclosures than public ones, but drafting them demands time and energy all the same. Implementing the principles-based standard will require some judgment. Assumptions you make — about variable compensation, the likelihood of collection, or the protocol you use to identify contracts — must be distilled down to your workers, applied, and then disclosed in the footnotes to the financial statements. And unfortunately, the disclosures will be heavily concentrated in your year of implementation. Depending on what adoption method you choose, you might need to restate certain amounts from previous years or explain why there are inconsistencies from year to year (or both). A qualified CPA can help ensure your disclosures are thorough, but it will be your responsibility to ensure you’re sharing with your stakeholders all the important facts and figures.
Yes, this is an accounting change. But it’s more than that. The standard was ten (10) years in the making. It’s a standard that will change the way your company looks at revenue, and it may even influence what contracts you enter in the future. Take a look at where you want to be at year-end and talk to your CRI advisor to help you build a plan that allows you to take it one step at a time. When the end of the year comes, you will be best prepared to report your revenues accurately and in full compliance with the new standard.