Make Sure You’re Prepared for the Revenue Recognition StandardJune 12, 2018
Marcus R. Harwood, CPA, MSPA
Several years ago, the Financial Accounting Standards Board (FASB) passed Accounting Standards Update 2014-09, Revenue From Contracts With Customers (ASU 2014-09). The standard replaced existing diverse revenue recognition models with a single five-step analysis that will be used by all companies to determine when to recognize revenue. The standard also contains disclosure requirements that may result in additional quantitative and qualitative discussions about how revenue is recognized.
The impacts of adopting the new standard will be far reaching, and in some cases will require significant effort by companies to prepare. So, with implementation deadlines fast approaching, it is more important than ever for financial statement preparers to assess the impact of the new rules and put an implementation plan in place.
Hopefully at this point, most financial statement preparers recognize the immediacy of the FASB’s deadlines. Public companies must apply the new standard for annual reporting periods beginning after December 15, 2017 while nonpublic companies must apply the new standards for annual reporting periods beginning after December 15, 2018.
Any companies that have not already begun the process should certainly make it a priority to understand the potential impact of the new standard and to develop an implementation work plan. Financial statement preparers should keep in mind that in addition to potential impacts on the timing of revenue recognition, the new standard requires disclosures that may necessitate capturing and disaggregating certain information in new ways.
While the magnitude of the impact will vary from company to company, there are a number of common indicators of the level of effort that may be required to implement the standard. These include revenue streams (is there one or are there many?), revenue cycle (is it short or long?), contract modification, lines of business (one or many?), base of operation (is it local or global?), deliverables (is there a single deliverable or are there multiple?) and ERP systems (one or many?).
While one size may not fit all, companies should consider developing an implementation work-plan containing the following steps:
- Identify implementation steering committee—The steering committee should have senior management sponsorship and include an appropriate allocation of resources. In addition to accounting and finance personnel, the committee may need representatives from tax, sales and IT, depending on the nature of the entity.
- Obtain appropriate training for steering committee members—The level of training will depend on the baseline accounting knowledge of each committee member and each of their roles in the project. For non-financial management, an overview of the new standard may be appropriate, whereas for financial management, detailed review of the standard and interpretative guidance will be necessary.
- Prepare an inventory of revenue streams—The listing of revenue streams will provide the starting point for analysis under the new revenue standard. As such, it is important that each revenue stream is identified early in the process; the identification should be reviewed by sales and executive management for completeness.
- Analyze each revenue stream under the new revenue standard—Depending on the number of revenue streams, it may be more practical to break up the analysis for each revenue stream into a separate analysis.
- Formulate preliminary conclusions—This should be done regarding changes in revenue recognition, changes to disclosures and planned adoption method and practical expedients.
- Auditor checkpoint—Discuss analysis and preliminary conclusions with external auditor and identify if further analysis or considerations are necessary.
- Update prior analysis as needed
- Identify changes required for internal controls—Include consideration of training for accounting, finance, sales and IT employees
- Identify changes required for IT systems
- Document impact on stakeholders and planned communication approach—This should include shareholders, lenders, employees and income tax reporting.
- Implement changes
- Post-implementation review
Marcus R. Harwood, CPA, MSPA, is a partner with BlumShapiro and leads the firm’s Education practice. BlumShapiro is the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with a team of over 500, offers a diversity of services which includes auditing, accounting, tax and business advisory services. Blum serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies. To learn more visit us at blumshapiro.com.