Sweeping rule changes for private companies that follow U.S. Generally Accepted Accounting Principles (GAAP) have many CFOs and controllers under the gun. If your company is struggling to implement the Accounting Standards Update (ASU) No. 2014-09 – Revenue for Contracts with Customers, it’s time to accelerate your efforts. Public companies that had to comply in 2018 generally reported that the adjustment took more work than they had anticipated. If your company is immediately affected, you must follow the ASU when issuing your financial statements for 2019. The deadline for other private companies won’t come until the end of this year or early in 2020, but even so, it’s time to get cracking.
A recent article from Thomson Reuters provides an overview of the five-step revenue recognition process U.S. GAAP now requires of most businesses:
- Identify the contracts with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize revenue as the entity satisfies a performance obligation
Although the revenue you report won’t differ much from what you would have reported under the old rules, the timing of when you can record revenue may change, especially for long-term, complex contracts.
The new guidance requires companies to assess:
- The extent by which payments could vary due to bonuses, discounts, rebates and refunds
- The extent that collected payments from customers are “probable” and will not result in a significant reversal in the future
- The time value of money to determine the transaction price
Thomson Reuters warns that “The result is a process that offers fewer bright-line rules and more judgment calls compared to old U.S. GAAP.”
Of course, the absence of bright lines is common whenever the government introduces new rules. Bright-lines tend to emerge from regulatory agency decisions and court rulings on disputed claims. What is necessary right now is a good faith effort to comply with the new guidance. You can demonstrate that good faith by taking reasonably prudent steps to understand the new guidance and to bring your company into compliance. This means consulting a knowledgeable source, such as Breon & Associates, retraining your staff on the changes, and setting a workable timeline that meets the deadlines.
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