We’ve got answers.
ASC 606, Revenue from Contracts with Customers, represents the most sweeping accounting change to hit companies in decades. Whenever there are changes this significant, there are bound to be questions. In our continuing look at the new revenue recognition standards, we attempt to answer some of the most common questions we are hearing from our clients and prospects.
1. When do I have to make the switch?
The new rules take effect starting in 2018 for public companies and 2019 for private companies. Before you take a deep breath and relax, consider that you need to take action now, as some of the preparation can take significant time and resources, and any customer contract initiated now that extends beyond the start date will be affected.
Note for the overachievers out there – entities are allowed to adopt the new standards as of annual reporting periods beginning after December 15, 2016. There are a few caveats, though, so do your research before taking the early dive.
2. How can I obtain and retain compliance?
An automated financial management solution and consistent, meticulous record keeping will be your allies here. And be aware that your existing ERP may not be up to the challenge. Among the challenges your financial system will need to effectively handle are:
- Reallocating revenue when a contract is changed
- Dual reporting so that you can see the impact of the changes on your firm’s bottom line
- Detailed forecast reports, again based on both the old and the new guidelines, to show your expected revenues, expenses, billed and unbilled revenues and cash
3. What are the impacts to my business likely to be?
The changes are sweeping, and will likely affect multiple aspects of your operation. We’ll cover the impacts with the biggest punch in an upcoming post, but below are a few that may not be immediately apparent:
- Discretion: You’ll be called upon to make more judgment calls and estimates surrounding the hows and whens of revenue recognition.
- Compensation: You may want to consider possible changes to compensation packages, if the compensation is based on revenue recognition.
- Taxes: The changes in timing of revenue recognition may result in changes in current taxable income since many entities use U.S. GAAP to determine revenue recognition for income tax purposes. We recommend our clients speak with a tax authority on this matter.
- Loans: Loans agreements that are impacted by or based on revenue may need to be adjusted.
4. In a nutshell, what are the changes?
The new revenue standard’s core principle is built on the contract between you and your customer for the delivery of goods and services. The standard requires five basic steps:
- Identify the contract with the 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 you satisfy a performance obligation