Today, different industries approach revenue recognition differently, making for a convoluted and inconsistent process. Tomorrow, businesses across the U.S. and Europe will follow the industry-neutral Revenue from Contracts with Customers guidelines.
Well, not quite tomorrow — in six months’ time for publicly held companies and nonprofits and 18 months for private businesses and other entities, starting with reporting periods beginning after December 15, 2017 and December 15, 2018, respectively.
Given the magnitude of the change, however, it’s really not so far away. The new guidelines will impact companies’ finance and IT departments in particular, as old, rigid accounting solutions are in no way capable of supporting ASC 606 compliance. But all business units, including tax compliance, contracts, and legal, will feel the impact as contract revenue reporting gets turned on its head.
The new revenue recognition model
The Revenue from Contracts with Customers guidelines (dubbed ASC 606 by the Financial Accounting Standards Board and IFRS 15 by the International Accounting Standards Board) establish a five-step process to govern contract revenue reporting. Broadly speaking, they are:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when or as you satisfy a performance obligation (rather than on final delivery, as in the past)
Delving deeper into the guidelines brings the complexities to light. For example, there are new considerations for bonuses, refunds, and penalties, and ASC 606 may impact how companies handle sales and use tax compliance on contracts, particularly recurring ones.
Sales and use tax is typically a tricky area for businesses, as regulations, rules, and rates vary widely by U.S. jurisdiction — there are more than 12,000. In some industries, such as manufacturing, distribution, and software, tax rules are especially complex and can change frequently. Businesses in any industry can find relief in automated solutions that seamlessly apply the right tax to customer invoices generated from contracts.
Relief in terms of adopting ASC 606 guidelines will come from planning ahead, allowing time to think through all the implications of the wide-ranging changes and adjust accordingly — not to mention plan for the transition. Yet, according to a Connor Group study, nearly 90 percent of public U.S. companies are behind on understanding how the new standards will impact their financial operations.
However, given that the future holds more complexity for essentially every business in every industry — even those for which revenue recognition has been neat and tidy in the past — the time for procrastination has clearly passed.
Prepare for changes now, by downloading our whitepaper.