New Revenue Recognition Standard: Are You Ready?

Organizations that issue any type of financial statement under GAAP will need to comply with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, by January 1, 2019. The deadline is quickly approaching. Is your organization ready?
 
This standard is so far reaching; if you haven’t yet assessed how it impacts your financial statements and debt covenants and haven’t yet created an implementation plan, time is of the essence. 

Creating Your Plan

The standard results in a five-step process to follow when recording revenue: 

1. Identify the contract
2. Identify separate performance obligations
3. Determine the transaction price
4. Allocate the transaction price to performance obligations
5. Recognize revenue as or when each performance obligation is satisfied  

Management must identify all the revenue streams of the organization, determine how the new five-step process will apply, and identify information and data needs.
 
Your implementation plan for the new revenue recognition standard should include the following:

• Become intimately familiar with the standard, including reading it and all relevant commentary you can find, and attending related programs
• Develop an overall adoption plan
  • Assign individual staff to become subject matter experts, including relevant staff outside of the finance organization (internal audit and legal, for example)
  • Establish a timeline and milestones
  • Consider discussing issues with peer organizations within your industry
  • Determine materiality
  • Consider the impact
    • Necessary verbiage changes for new related contracts
    • Recognition processes within the accounting system
    • Technical changes within accounting or supporting systems
    • Monthly and annual financial close process
    • Internal financial reporting
    • Audited financial statements
    • Transition method selection
    • Forecast and budget processes
    • Dashboard goals
  • Update your revenue recognition policies and procedures for each of your revenue streams in light of the new standard 

Considerations Specifically for Private Companies 

Below are key implementation tips to consider during the process. 

• There are four factors currently driving cost and impact for many private companies.
  • The industry you operate in can make a difference. Industries significantly impacted by this new standard include construction contractors, contract manufacturers, retailers and distributors, healthcare, not-for-profit and software.
  • Do you currently apply SEC guidance on revenue recognition? The new revenue recognition standard uses a number of concepts from SEC revenue recognition guidance that applied to all entities (such as bill and hold, non-refundable upfront fees and customer acceptance, for example).
  • Do you have strong or weak controls over contracting? If controls are strong, then contract enforceability will be less of an issue.
  • Do you have strong or weak controls over sales and marketing? If controls are strong, then sales and marketing incentives will be easier to identify and evaluate in relation to variable consideration.
• Enforceability of the rights and obligations in a contract with a customer is a matter of law. Identify transactions where enforceability issues may exist, such as oral agreements over $500, including phone orders, orders communicated in-person, continuing service with existing contract where the written contract has expired, master services agreements, side agreements that void original agreements, and conditional clauses.
• Revenue under the new standard is recognized as performance obligations are satisfied. Contracts are recognized over the life of the contracts if certain criteria are met and should be assessed on a contract-by-contract basis. It is important that you identify all contracts to which enforceable right-to-payment for performance-to-date applies.
• Revenue recognition does NOT necessarily equal invoicing. The following items would not be recognized upon invoicing: Certain marketing incentives, contract determination method over time versus a point-in-time, variable consideration, arrangements that fail to meet the definition of a contract, multiple promises, unapproved change orders, bill-and-hold arrangements and customer acceptance.
  • There is a practical expedient that says if an invoice amount corresponds directly with the value a customer has received to date in an “over time” revenue recognition situation, the entity can recognize revenue in the amount for which it has a right to invoice (the “right-to-invoice” practice expedient).
• If it is typical to have modifications to existing contracts at your organization, there are varying ways to account for them depending on the facts and circumstances. 
• Ensure you have a detailed understanding of the promises in a contract versus distinct performance obligations. They are not the same. Promises may be performance obligations by themselves or may be bundled with other promises to become performance obligations if they are not distinct individually. 

Transition Approach

There are two transition methods when implementing this new standard: 

1. The full retrospective method, in which you would retrospectively adjust your financial statements to each reporting period presented for the new standard, OR
2. The modified retrospective method, in which you would retrospectively adjust your financial statements with a cumulative effect recognized at the date of initial application through equity as of January 1, 2019.

Note that the prospective transition is not allowed! More organizations are leaning toward the modified retrospective method. Collaborate with your accounting service team to help you determine which transition method is preferable for your organization. 
 
Your accounting service team can assist you with the implementation process in its entirety. Don’t wait to reach out if you haven’t already done so. The sooner your implementation plan is in place, the better position you organization will be in to comply.

Contact Tina Dzik or a member of your service team to discuss this topic further. 

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.