Understanding the New Revenue Recognition Standard

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We're a little over a month away from the January 1, 2018, effective date (for calendar-year-end companies) for the new revenue recognition standard. Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 codifying ASC 606, Revenue from Contracts with Customers, back in 2014, around the same time that the International Accounting Standards Board issued International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers. These standards are essentially similar and were designed to be, bringing international and American standards closer together.

Hopefully, you've reviewed the new standard before now - but if not, now's the time! 

Understand Who it Affects

This one is pretty simple. The new revenue recognition standards affect pretty much everyone. All public, private, and not-for-profit entities that enter into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (like leases and insurance contracts) Some things are not within the scope, like financial instruments, guarantees (other than product or service warranties), and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.  

Understand The New 5-Step Model

The new rev-rec standard may not be rule-based, but it is still principles-based. The first step of the new model is simply to identify the contract. Next, you identify separate performance obligation. Then allocate the transaction price to the separate performance obligations and, finally, recognize revenue when the entity satisfies a performance obligation.

Easier said than done? Of course. But the new model does attempt to correct the inconsistencies and weaknesses in the old standard. 

Understand the Transition Methods

There are two types of transition methods. The Modified-Retrospective Method (MRM) and the  Full-Retrospective Method (FRM). 

In the Modified-Retrospective Method (also called the Cumulative-Effect Adjustment Method) the prior years’ data is not recast. A single adjustment is made to equity (usually retained earnings) at the beginning of the initial year of application instead. This one-time entry should adjust the beginning equity balance to what it would have been if the entity had applied ASC 606 to either all unfinished contracts (unfinished under ASC 605) as of the beginning of the current period, or all contracts pertaining to the years presented. Additional disclosures and explanations will also be required.

The Full-Retrospective Method requires recasting all prior years’ data on comparative financial statements, following the guidance for any change in accounting principle found in ASC 250-10-45, Accounting Changes and Error Corrections—Other Presentation Matters. This method will require entities to look at every contract or contract class (with a few exceptions for practical expediency), including those that are considered complete under ASC 605 as of the beginning of the period. Entities must examine and evaluate the performance obligations attached to both completed and uncompleted contracts, and adjust revenue recognition in past periods as needed. If the practical expedients are used, disclosures are required. 

Thankfully, you don't have to go through this alone. There are many resources available to help you understand and implement the new revenue recognition standard, including our latest "Hands-On" Webinar. Register for the webinar today and get ready to learn from revenue recognition expert Lynn Fountain.