There are numerous changes with the revenue recognition standard that will have an impact on your financial statements, either through changes in the amounts presented or enhanced disclosures. With all the changes coming, where do you get started with implementation? Below are five recommendations to implement ASC 606 Revenue Recognition from Contracts with Customers:
- Prepare a complete list of revenue sources
To assess the impact on your entity, the best starting place is to identify where your entity earns its revenues. From the general ledger revenue accounts a complete list of revenue streams can be created. However, ASC 606 goes deeper than revenue streams, so next steps include identifying revenue impacting promises to provide future products or services to customers that may include, but are not limited to, rebate or discount programs, loyalty incentives, warranty programs, coupons and gift cards.
- Review contracts with customers
For each revenue source listed, the underlying contracts with customers will need to be reviewed. Contracts can have many forms; some 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 these contracts, an entity needs to consider the performance obligations or promises to deliver products or services to their customers. These obligations could be the delivery of a product or service at a specific time or a group of product or services to be provided over a specified period of time. The timing of the delivery of the performance obligation will determine when revenue is recognized. Entities should evaluate whether the terms in their contracts sufficiently address the delivery of products or services or whether changes are needed to clearly define such terms.
- Review software applications and other information gathering processes
With significant changes to revenue recognition, there could be needs to modify software and other information tracking processes to properly record revenues. Information gathering changes may include assembling a cross-functional group such as marketing and sales in addition to accounting personnel on how promotional programs, coupons, rebates and other future promises to customers are tracked. These future promises to customer will need to be considered when recognizing revenue at the outset of the contract.
- Determine method of implementation and review financial statement disclosures
The standard has two methods for implementations, including retrospective to all comparative periods presented or retrospective to the current period with a cumulative adjustment at the date of adoption. After selecting an adoption method, there are optional practical expedients to ease the transition by not applying the new standard to contracts complete prior to the date of adoption among other expedients. The adoption method determines the necessary disclosures in the period of adoption, but there are disclosure enhancements that will be ongoing that require new information to be disclosed in the financial statements about how your entity recognizes its revenues. In addition, understanding and documenting an assessment of the differences from the legacy guidance under ASC 605 and new guidance under ASC 606 will aid in the transition and enhanced disclosure requirements.
- Educate key stakeholders about the standard changes
Implementing a new standard requires a considerable amount of work in the period through the adoption; however, properly applying the standard continues past the adoption date. The key stakeholders need to understand the standard impact on the financial statements, but more importantly how financial statements users, such as bankers or investors, will understand your business and the impacts on how your entity contracts with customers.
There is a lot to consider when implementing the revenue recognition standard. Contracts may need to be revised, loyalty programs may need to be restructured, customer credit may need to be reassessed, and information gathering process may need to be developed. Want help getting through the process? Contact an Eide Bailly representative today to see how we can help.