Revenue Recognition Issue 9 – Special Focus: Manufacturing
Sales in a manufacturing environment can take a wide variety of directions that would result in significantly different revenue recognition timing on a company’s financial statements.
If your operation makes a very simple product that is sold on a piece-by-piece basis and there is no fulfillment obligation other than for the customer to pay you for what you deliver to them, then your answer may be relatively simple: you record sales as you might do today based on shipments of product to the customer, and accounting for the potential for returns, allowances, and warranty exposure.
But most manufacturers face a significantly more complex situation. They have a mix of simple and complex products, some may even be manufactured over a long period of time or be custom products for a specific customer that have no alternative use if the customer were to not take the products for some reason. It is critically important that you understand and bifurcate the types of sales that you have to your customers and the types of contractual relationships that you have with your customers, in order to understand how to recognize revenues on your financial statements.
The days of recognizing revenue when you send an invoice may be coming to an end for your company, and the sooner you prepare for this eventuality the better. It would not be at all unusual for you, under these new standards, to find that you are having to reflect some of your revenues over the contract period, other revenue streams at the completion of the contract, and even some contract streams when the customer has received, accepted and paid for your products.
Please contact your BMF Advisor for additional information regarding the new standards.
Tax Accounting Method Considerations
The impact of this change hits more than just the financial statements – significant tax changes could also lie ahead. The new standard presents a unique opportunity for companies to revisit their tax methods for revenue recognition. Not only do they need to ensure compliance with the tax rules, but they can also take advantage of tax opportunities and planning around revenue recognition. Companies will need to determine whether the new book methods will be permissible for tax purposes.
In instances where the new methods are permissible, the company could file a Form 3115 to implement the new methods on its tax return. If the new methods are not permissible or if the company chooses to continue using their current tax methods, the new financial accounting changes could affect or create new book-tax differences and deferred taxes related to revenue recognition. Companies will need to consider the information needed to compute these book-tax differences, and whether the information will be available after the changes for financial statement purposes.
It is important to plan ahead to make sure that tax considerations are considered upfront and not an afterthought. Companies should thoroughly assess all their revenue streams and the proper tax methods for each to plan the appropriate actions for successful implementation.
James E. Merklin?>
CPA/CFF, CFE, CGMA, MAcc
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