Revenue recognition – What nonpublic entities need to know

To save time and money, begin the assessment process for new revenue recognition standards today

It’s hard to believe that four years have passed since the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (bit.ly/Topic606PracticeAid). Nonpublic entities now find themselves a mere six months away from adopting this comprehensive standard.

With Big 4 accounting firm surveys indicating that the standard is more complex, time-consuming and costly to implement than anticipated, nonpublic entities should begin the assessment process today.

What is the Standard?

A joint effort by the FASB and the International Accounting Standards Board (IASB), the updated standard clarifies the principles for recognizing revenue and establishes a common revenue standard for U.S. generally accepted accounting principles (GAAP).

According to the standard, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The goal of the standard is to make it easier to compare revenue recognition practices across entities, industries, jurisdictions and capital markets. It also intends to improve disclosure requirements that provide more useful information to users of financial statements.

How to Assess the Standard

Assessing the standard takes time – and a significant level of effort. Keep in mind that the assessment process should be tailored to the complexity of the entity’s revenue transactions and contracts.

The following steps provide a framework for assessing the standard:

Step 1: Understanding, Scoping and Planning

This is the most important step in the implementation process because it provides guidelines for all future work. An entity’s accounting team should take time to read and comprehend the standard. The team should then identify who internally or externally can provide the knowledge and expertise needed to interpret and apply the standard to customer contracts.

Step 2: Technical Analysis and Assessment

Once revenue streams and contract types have been identified, the entity needs to allocate resources to evaluate the impact of the standard. This includes evaluating industry-specific guidance, determining a transition method to be applied at adoption, identifying systems and internal control considerations, and, hopefully sooner than later, involving external auditors to review the scoping and implementation action plan.

Step 3: Testing and Implementation

With an implementation action plan approved internally by the entity’s management and externally by auditors, an entity will move into the testing and implementation stage. This stage includes a number of heavy-lifting steps whereby resources will need to ensure tracking of revenue transactions is being captured in a useful manner that can produce financial information under both current GAAP and Topic 606. For nonpublic entities, it will be important to consider the adoption method to be used as it will impact the financial information that will need to be produced.

Step 4: Financial Reporting and Disclosure

In this stage, the entity will begin to identify the impact of the standard on financial statement disclosures. Expanded disclosures include, but are not limited to, the evaluation of the adoption impact on financial statement figures, disaggregation of revenue, disclosure of performance obligations, and other qualitative factors. Proactive evaluation of the disclosures with external auditors will make the process more efficient and cost-effective.

Step 5: Post Adoption

Regardless of the impact of adopting the standard, an entity should ensure it establishes appropriate controls to maintain accounting policies, evaluate new revenue contracts and ensure personnel stay on top of the standard. After making an upfront investment of time, energy and money to adopt the standard, it’s in the entity’s best interest to maintain a high standard of financial reporting.

And You’re Off…

Taking time today to comprehend the standard, evaluate its impact and proactively communicate with internal and external parties will vastly improve the efficiency and cost-effectiveness of implementing this standard.

Drew Stevenson is a CPA with Perkins & Co.

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