For the first time in several decades, the organizations that establish accounting and reporting standards for public and private companies – the Financial Accounting Standards Board (FASB) in the USA and the International Accounting Standards Board (IASB) – have announced new guidance for contract revenue recognition – ASC 606 and IFRS 15.
The changes will take effect in 2018 financial reports for public companies and in 2019 financial reports for private companies.
To comply, affected companies will need to review contracts and possibly restate timing of their revenue. It may be necessary to modify computer systems and change procedures in areas such as sales, accounting, financial reporting and internal audit.
What is ASC 606 and IFRS 15?
The Accounting Standards Codification (ASC) 606 issued by FASB and the International Financial Reporting Standards (IFRS) 15 issued by IASB are both titled Revenue from Contracts with Customers and reflect the organizations’ agreement on best practices for contract revenue recognition across industries.
What is changing?
The new standards define Contracts with Customers as transferring goods, services or non-financial assets unless the contracts are already covered by other standards such as leases or insurance contracts. The change establishes a 5-step process for revenue recognition:
- Identify contracts signed with customers.
- Identify timing of separate performance obligations in each of those contracts.
- Determine the transaction price for the contract.
- Allocate the transaction price to each of the performance obligations.
- Plan for and recognize revenue as performance obligations are satisfied.
A major implication of the new process is that instead of recognizing revenue when the cash is received, companies will recognize revenue when performance obligations – formerly referred to as deliverables – are met.
Who is affected and how?
Companies who frequently change the terms of a customer contract will be most affected. Each time a customer contract changes, the new standards require companies to reassess the performance obligations and if necessary, reallocate revenue across the contract and defer expense recognition to align with the contract’s new delivery schedule.
So, it should be obvious that companies relying on Excel spreadsheets to prepare financial statements will see their workload significantly increased with the change. Additionally, accountants will have to keep two sets of books for a number of years to show and compare revenue recognition under old and new regulations.
This content was originally posted here.