Revenue Recognition Issue 1 – Introduction to Revenue Recognition: Why You Should Care
What is it?
On May 28, 2014, accounting rule makers (FASB and IASB) adopted new standards for recognizing revenue in your financial statements from customer contracts. Revenue is the single largest line item in most companies’ financial statements and this wide-reaching standard is expected to impact virtually every company.
This standard applies to all contracts with customers, except for the following types:
Non-Monetary Exchanges between entities in the same line of business to facilitate sales to customers
In addition to impacting your financial reporting, there are also income tax implications to these changes. When you go through implementation, you will need to keep your tax advisors close at hand so that an assessment of book-to-tax differences may be considered, as well as the possibility of applying to the IRS for a change in accounting method.
Why the change?
The objective of the new guidance is to establish principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The new guidance will:
- remove inconsistencies and weaknesses in existing revenue requirements;
- clarify and coalesce the revenue recognition principles under U.S. GAAP and IFRS;
- develop guidance on revenue recognition requirements; and,
- provide a more robust framework for addressing revenue issues.
When does it need to get done?
Nonpublic companies need to adopt these rules for annual reporting years beginning after December 15, 2018, but will not be required to be in interim financial statements until periods beginning after December 15, 2019.) Early adoption is permitted.
What do I need to do?
The rules provide for two alternatives for adoption of the new standard:
- The full retrospective method provides that when you adopt these standards into reporting for your 2019 annual financial report, you would restate your 2018 results of operations and would reflect a cumulative effect adjustment into your financial statements as of the beginning of2018 (to show the impact on owners’ equity if the standard had been applied prior to 2018).
- An alternative modified retrospective method is available which provides that, when you adopt these standards into reporting for your 2019 annual financial report, you would not restate 2018, but rather would present the cumulative effect adjustment in your financial statements as of the beginning of 2019 (to show the impact on owners’ equity if the standard had been applied prior to 2019). Most importantly, in the case of the modified retrospective method, the readers of your 2019 financial statements will need to understand that the basis of accounting used in a comparative financial statement presentation will be inconsistent, and would include additional footnote disclosures to help the user “bridge the gap.”
Do I have to?
If you see no value in assessing the impacts these standards will have on your financial statements, and if all users of your financial statements agree, you can use an “Other Comprehensive Basis of Accounting” (OCBOA) instead of reporting your results based on generally accepted accounting principles (“GAAP”). Some other methods for financial reporting are:
Modified Cash Basis
Financial Reporting Framework for Small/Medium Enterprises
Each of these other methods of reporting has their pros and cons, and we recommend you speak with your BMF advisor to assess your best option. One key consideration in the use of one of these methods is whether your bank would accept annual financial statements using them, and if so, whether debt covenants would need to be amended (as appropriate) to reflect the OCBOA that you choose.
Stay tuned for additional alerts in our Revenue Recognition Series. Next up in our series, The Basics of Revenue Recognition – The 5 Step Approach.
James E. Merklin?>
CPA/CFF, CFE, CGMA, MAcc
About the Authors
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