The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 – Revenue from Contracts with Customers in May of 2014, and it’s set to take effect in two years. This standard and its various related amendments bring a far-reaching overhaul to the accounting for revenue and related financial statement disclosure that affects virtually every entity producing financial statements, from the large manufacturing company with multiple contractual deliverables to hospitals, clinics, and even the locally owned corner convenience store. Many are discovering that as they peel back the layers of this standard, revenue recognition will be changing in even the simplest of operations.
But in today’s rapidly changing business landscape, two years is the distant future, right? Why should you worry about the new standards now? Well, there are some compelling reasons your organization should begin evaluating these changes sooner rather than later.
Why the Change?
Many have asked why FASB created a “one size fits all” standard given the diverse landscape of operating entities. The answer is in the question. Companies are identifying increasingly complex and diverse ways to structure businesses, and adding a reactive, continuous flow of revenue recognition standards to address each emerging structure was becoming an impossible task. Lack of or lagging guidance in revenue recognition has a significant impact on lenders, investors, and other users of financial statements. In response, FASB developed a principles-based approach wherein any entity could evaluate their sales structure and related revenue streams to determine the most relevant and consistent way to recognize revenue despite the evolution of the business.
Initially, the effective date for nonpublic entities was for periods beginning after December 15, 2017, (i.e. December 31, 2018, year-ends). Given the magnitude of the change, FASB extended the effective date one year to periods beginning after December 15, 2018 (i.e. December 31, 2019, year-ends). As many nonpublic entities only issue GAAP financial statements once a year, it’s common for these entities to wait until the effective year of a new standard to start evaluating implementation. While that strategy may have been sufficient for past standards updates, waiting on implementing revenue recognition could result in a significant change in reported revenue because the criteria for recognizing earnings is changing. Contracts may need to be revised, loyalty programs may need to be restructured, and customer credit may need to be reassessed in 2017 to ensure that activities straddling the 2018 year-end will not result in revenue recognition changes, or that those changes are understood and being considered.
Additionally, the new revenue recognition standards may have significant tax implications that will also need to be considered. The new standards may impact the timing of reporting revenue for tax purposes, which can result in additional tax accounting burdens as well as tax filing obligations in the year of implementation.
We will be providing a series of articles discussing the five components required for revenue recognition, as well as illustrations to help entities understand what to evaluate when applying the framework to their individual revenue arrangements and transactions. The five components are:
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligation in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
Can’t wait with your questions? Let's Talk. Contact an Eide Bailly representative today. We can help you through this process.