Getting Ready for the New Revenue Recognition Standards
In one of the most significant changes to U.S. GAAP in years, the new revenue recognition standards go into effect for private companies for years beginning after December 15, 2018. For many, this will require significant effort to evaluate the impact of the changes and could have a substantial impact on when revenue is recognized and the timing of recording certain types of expenses.
On September 5th, we hosted a full-day interactive workshop to better digest these changes and how to practically apply them. Our speaker, Scott Ehrlich, President of Mind the GAAP, LLC, presented to over 100 clients and friends and commented that this is the most complicated accounting standard change that he’s ever encountered in his career.
In case you missed the session, the following are Scott’s comments and brief takeaways and from the workshop.
- What has been seen nationwide is that many private companies still think these new standards don’t apply to them or they aren’t paying enough attention to the changes being made by these rules.
- Scott cautioned companies that while it might seem “on the face” that adoption using a cumulative catch-up method effective the first day of 2019 might seem easiest (and it might very well be), to be careful before jumping into that option because of (1) the concept of “lost revenue” that will essentially get buried in your equity section of the balance sheet and (2) the additional disclosure requirements if you select that option.
- Existing IT systems may not be adequate in capturing the required data. This needs to be evaluated and companies should build in enough lead time to ensure they can gather the right information.
- The effect of the new standards could potentially impact items that may require additional evaluation, such as debt covenants, sales commissions, metrics for employee incentive programs, etc. It is important to recognize these considerations upfront so that you do not inadvertently miss these key issues.
- Post-implementation, the footnotes to annual financial statements will require including robust disclosures, both quantitative and qualitative, about the methods and types of revenue that is generated by the company. This comes on the heels of the current GAAP standards that require very little disclosure about what is typically the largest number on a company’s financial statements. It will be critically important that companies not try to rely too heavily on “templates,” but rather customize their disclosures to what makes sense for their organizations. Significant management judgment will be required in this process.
Ultimately, participants learned that the time is now to start their process for assessment and to not underestimate the resources that will be needed to go through implementation of the standard. As with anything else, development of a project plan upfront will benefit your organization to ensure this standard is adopted in the most effective, efficient way.
We are working with clients through their implementation process and would be happy to work with you on your plan of adoption. Please contact me or your BMF advisor to set up a time to discuss how best to proceed.
James E. Merklin?>
CPA/CFF, CFE, CGMA, MAcc
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