Why You Should Care About the Revenue Recognition Standard

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Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), the Financial Accounting Standards Board’s (FASB) revenue recognition standard, has now been adopted by nearly every entity that was required to adopt it. How did your adoption go?

FASB issued ASU No. 2014-09 – Revenue from Contracts with Customers in May of 2014. This standard and its various related amendments overhauled the accounting for revenue from contracts with customers and enhanced revenue related financial statement disclosures. Every non-governmental entity that has contracts with customers was impacted by the new standard – from large manufacturing companies with multiple contractual deliverables to hospitals, clinics, and even the locally owned corner convenience store.

Now that most nonpublic entities have adopted the new revenue recognition standard, the FASB is looking for your help as they perform their post-implementation review process. Your completion of a short survey will help the FASB understand your experience with the implementation of ASU 2014-09 and will help the FASB improve the overall standard setting process. Please consider providing your input.

Why did FASB Change the Revenue Recognition Standard?

The changes in the revenue recognition standard created a “one size fits all” standard that covered the diverse landscape of operating entities and addressed increasingly complex and diverse ways to structure transactions and recognize revenue. Lack of or lagging guidance in revenue recognition was beginning to significantly impact lenders, investors, and other users of financial statements. The principles based approach developed in ASU 2014-09 provides a framework which allows any entity to evaluate their contracts with customers and the related revenue streams to determine the most relevant and consistent way to recognize revenue, despite the intricacies of their business.

Learn more about revenue recognition with our eBook

When did the revenue recognition standard take affect?

The effective date for nonpublic entities was initially for periods beginning after December 15, 2017, (i.e. December 31, 2018, year-ends); however, after several delays and a global pandemic, final implementation didn’t occur for many entities until annual reporting periods beginning after December 15, 2019 (December 31, 2020 year-ends).

Do you need a refresher on the most significant components of the revenue recognition standard?

Look through this information as you prepare for your upcoming financial close to make sure you have a good understanding of how the new revenue recognition standards impact your entity’s financial statements.

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.

Now that your entity has adopted the new revenue recognition standards, what should you be thinking about?

Here are some areas to look at as your entity re-evaluates how you initially implemented ASC 606, Revenue from Contracts with Customers:

1. Make sure you have a complete list of revenue sources.
Identify where and how your entity earns its revenue and make sure you have a complete list of revenue streams. Then identify contractual elements that impact revenue recognition, including revenue that impacts promises to provide future products or services to customers, such as rebates or discount programs, loyalty incentives, warranty programs, coupons and gift cards.

2. Re-review your contracts with customers.
For each revenue source you identify, make sure your initial understanding of the underlying contracts with customers has not changed. Remember – contracts can have many forms. Some contracts may be implicit, only providing an invoice, sales order, or receipt on completion of the performance obligation. While others could be explicit, such as a supply or construction agreements. When reviewing your contracts again this year, be sure to consider the performance obligations or promises to deliver products or services to your customers. These obligations could be the delivery of a product or service at a specific time or a group of products or services to be provided over a specified period. Timing of the delivery of the performance obligation determines when revenue is recognized. Make sure the terms in your contracts address the delivery of products or services. If they do not, make any needed changes to clearly define contract terms.

Learn more about revenue recognition with our eBook

3. Re-review software applications and other information gathering processes.
Did your software or other information tracking process provide you with an efficient method of obtaining adequate records to properly record revenue? If not, start thinking about what needs to change. Assemble a cross-functional group such as marketing and sales in addition to accounting personnel to map out the best way to track promotional programs, coupons, rebates and other future promises to customers. You should consider these future promises to customers at the outset of the contract.

4. Review your financial statement presentation and disclosures.
The new standard changed how an entity presents transactions related to contracts with customers in their financial statements and contains more robust disclosure requirements than previous revenue standards. Review your entity’s financial statement presentation and disclosures to make sure you appropriately classified all transactions related to revenue from contracts with customers and have included all required disclosures.

5. Ensure key stakeholders really understand the standard changes.
Implementing a new standard requires a considerable amount of work in the period of the adoption; however, properly applying the standard continues past the adoption date. Key stakeholders need to understand how the revenue standard impacts your entity’s financial statements and how financial statement users, such as bankers or investors, will use the information in your financial statements to understand your business and your entity’s contracts with customers.

What was your experience with implementation of the new revenue recognition standard? Take the survey to let FASB know about your adoption approach.

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