In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The new revenue recognition standard will significantly affect the revenue recognition practices of most companies. The standard is effective for the year ending December 31, 2019 for non-public companies and will require analysis of prior year financials for possible adjustment.
You need to be aware that most nonpublic companies will be required to adopt this new revenue standard in 2019. As part of this implementation, companies will need to review their contracts and assess the accounting impact of various contract terms. As a partner, we are here to provide insights and assistance on performing effective contract reviews and examples of terms and conditions that may have accounting implications under this new standard.
Please read the information below and reach out to us with any questions you may have.
OVERVIEW OF FASB ASC 606: REVENUE FROM CONTRACTS WITH CUSTOMERS
As stated above, FASB (Financial Accounting Standards Board) has issued their new converged revenue recognition standard (ASC 606). This new standard will affect almost all companies to some extent, with the significance of the change varying depending on your industry and current accounting practices.
The effort to identify potential changes and transition to the new guidance will likely take more time than most private companies would typically expect – and is certainly more than most accounting standards issued in recent memory.
What do you need to be focused on today?
Often, the first reaction to a new accounting standard is: “How will this impact the numbers in my financial statements?” This new revenue standard is one of the most extensive accounting changes seen in years, and it affects arguably the most important financial metric for many companies, which makes this a difficult question to answer. The impact could be financially significant, it could be limited primarily to additional disclosures, or some place in between. Melanson Heath is available to help with how this will affect your particular business.
Effective Date and Adoption Considerations
For US GAAP nonpublic entities, the standard is effective for annual periods beginning after December 15, 2018 (2019 for calendar year-end entities).
How do you get started?
We recommend breaking the implementation of the new revenue standard into three steps:
- Assess: Establish a project management approach and ensure those involved have appropriate training and education
- Convert: Select an adoption method and consider the information required
- Embed: Educate and communicate within the organization, effect process and system changes
In the near term, we encourage companies to inventory the types of contracts and arrangements currently in place. This will be the starting point for facilitating the assessment phase.
Where do I go from here?
From our experience, there is no way of truly understanding the implications of the new guidance on revenue accounting until companies process a sample of their contracts and arrangements through a five step model (below). This can help assess what the ripple effect will be on other departments outside of accounting, where new accounting policies or processes need to be developed, and whether the right resources are involved.
The five steps of the new model are:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price
- Recognize revenue when (or as) the entity satisfies a performance obligation
If you have any questions on what you can do and how this may affect you, please feel free to reach out to us and we will be happy to help you!