Extra, Extra! Read all about it: The accounting change of the decade – revenue recognition implementation – is here!
Well, sort of?!?
The Revenue Recognition Implementation Headline
The new revenue recognition standard was released in May 2014 and aims to increase consistency and comparability in today’s global marketplace by instituting a five-step revenue recognition model for companies of all sizes across all industries. The change was originally slated for reporting periods on or after December 15, 2016, for U.S. public companies (and December 15, 2017, for private companies); as of last month, the Financial Accounting Standards Board (FASB) voted for a one-year deferral of the required effective date and will be issuing an exposure draft for comment – “early adoption” is an option, see below.
The Revenue Recognition Implementation Hook
This sweeping change will not only shake up the foundation of financial statements and the related footnote disclosures, but it also will require changes to systems, controls, policies, and processes. Given the significance of the change, the layout for this headline should begin now. For instance, identifying current contracts and potentially affected areas of your business should begin sooner rather than later.
No Spin Revenue Recognition News
After conducting outreach with corporate accounting personnel, auditors, and financial statement users representing multiple industries (and receiving 1,400 comment letters from companies that have already taken action), the FASB consistently received feedback representing three main areas:
- Complaints of significant expense—implementation-related software updates, contract revisions, restatements, etc.,
- Requests for additional guidance, and
- Appeals for more time.
The Rest of the Revenue Recognition Story
In order to deliver the scoop Paul Harvey style, we sent in our bulldog investigative team learned that the requests for additional guidance centered around three specific areas where the FASB staff has and continues to expend its resources. They are: intellectual property (IP) licenses, performance obligations within the context of the contract, and gross vs. net analysis. Besides the uncertainty surrounding what data companies need to capture in these areas, below are some of the specific questions FASB staff are tackling.
- IP Licenses
• Are obligations to provide IP licenses satisfied at a point in time or over time?
• How should royalties associated with the sale and use of IP licenses be recognized?
- Performance Obligations within the Context of a Contract
• Will the new guidance result in more performance obligations being identified due to the directive to capture both implicit and explicit promises to provide goods or services?
• Is the shipment of goods a promised service?
• When are goods and services distinct within the context of a contract?
- Gross vs. Net
• When is an entity or a principal entitled to recognize the gross amount paid by the customer for a good or service versus an agent entitled only to recognize the net amount retained as a fee or commission after paying the principal for the goods or services provided to the customer?
Many of these questions stem from the degree of judgment required in applying the new standard. This shift in approach poses challenges for many U.S. companies who, accustomed to the historically prescriptive U.S. GAAP, have not yet had to apply the amount of judgment that is more typical of the principle-based International Accounting Standards. And, increased judgment springs increased disclosure requirement, as companies must explain the methodology behind their estimates, decisions, and policies. Specifically, many small to mid-size companies with fewer resources may struggle to meet these increased disclosure requirements.
The Revenue Recognition Implementation Scoop
The FASB has decided to grant companies, both public and private, an extra year to comply with its new requirement. But please don’t insert that sigh of relief quite yet: they’ve provided this extension so that the time can be utilized to implement the changes. After all, correct application of the new rules is critical since revenue recognition shapes a company’s entire financial picture. CFOs and controllers will need the extra time granted to dive in and plan for the pervasive impacts—not to mention collecting up to three years of annual and/or quarterly comparative data should they choose the retrospective application option. So the overwhelming message is to keep focusing on the upcoming deadline!
Another angle to this story: Given the efforts by many U.S. companies to comply with the original implementation date, the FASB has provided both public and private companies the option to implement the guidance on the original implementation dates (which would now be considered “early adoption,” given the deferral).
Share the Revenue Recognition Implementation Byline with CRI
Do you have a plan in place to make sure you hit the ground running with implementation of the new revenue recognition standard? Stay tuned for your exclusive updates on the standard while ensuring that you have the latest scoop on timelines, implementation plans, and the standard’s details. That way, your business will be ready and compliant when your selected effective date for the new revenue recognition standard arrives.