The clock is ticking: How to prepare for the new revenue recognition standard

Beginning in 2019, privately held companies that follow U.S. generally accepted accounting principles (GAAP) will be required to adopt a new accounting standard related to the recognition of revenue. (In business parlance, this is commonly referred to simply as “revenue recognition.”) This new standard may significantly change these companies’ current revenue accounting processes.

The time to begin preparing is now.

The new revenue recognition standard requires companies to apply a five-step model to recognize revenue from customers. The five steps are:

  1. Identify the contract with a customer.
  2. Identify each performance obligation in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to each performance obligation.
  5. Recognize revenue when or as each performance obligation is satisfied.

The new standard will also require:

  • A substantial increase in the amount of disclosures needed to describe the company’s revenue process and contracts.
  • Important management judgment calls regarding accounting for revenue recognition.

These changes will have a far-reaching impact on organizations’ policies, processes and systems. If this all sounds a bit intimidating, don’t worry. Here’s how to prepare.

  1. Establish a team
    The key to success in implementing a standard of this magnitude is pulling together the right team. This cross-functional implementation team should include participants from different company functions. We suggest creating your team with colleagues from accounting, tax, information technology (IT), engineering, sales and marketing, and human resources.

  2. Perform a readiness assessment
    The implementation team should perform an assessment to review existing contracts. They’ll seek to determine:

    How the existing contracts should be accounted for under the new standard.
    Whether the company’s systems and processes are capable of accommodating the new requirements.
    Understanding your contracts and system capabilities is vital to determining your organization’s readiness in a timely fashion.

  3. Select a transition method
    The standard requires companies to transition using one of two methods. Those methods are:

    Modified retrospective method
    Under this approach, companies 1) recalculate revenue using the new standard for all contracts not completed by the adoption date, and 2) record a cumulative-effect adjustment to the opening balance sheet for the year of adoption.

    The adjustment reflects the difference, as of the adoption date, between the cumulative revenue the company recognized under current GAAP and the amount it would have recognized had it applied the new standard to those uncompleted contracts.

    Under this approach, the company need not restate comparative prior-year periods. But it must disclose the impact of the new standard on each financial statement line item in the year of adoption, and explain the reasons for any significant changes.

    Full retrospective method
    Under this approach, companies must restate revenue for all prior periods presented in their adoption-year financial statements. To ease the burden of retrospective application, however, the new standard offers several “practical expedients” to streamline the process. For example, a company need not restate contracts that began and ended within the same annual reporting period.

    Note: In addition to applying the new standard to prior periods, companies using the full retrospective approach must also determine the cumulative effect of applying the new standard as of the beginning of the first period presented.

  4. Develop a project plan
    At this point, you’re ready to develop a project plan, which should include:

  • Drafts of new accounting policies and procedures
  • The identification of controls to help confirm information accuracy.
  • An implementation plan.
  • Consideration over whether any IT systems changes are reqired in order toa accomadate the requirements of the new standard. 

Start today

The new revenue recognition standard has an impact on essentially every company. Organizations should begin now by becoming familiar with the new standard, assessing the rules on specific issues that impact them, and implementing an effective and efficient plan. Contact your Rehmann advisor or call 866.799.9580.

Published in Business Wisdom

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