Preparing for Revenue Recognition…
by Ben Ripple
The Financial Accounting Standards Board (“FASB”) issued revenue recognition guidance in 2014 that will result in significant changes for almost everyone. For nonpublic companies, the implementation of this standard is for years beginning after December 15, 2018. To help prepare for implementation of this new standard, we will be writing a series of articles in 2018 to highlight specific areas of the new standard that will be of concern during the transition. For now, here is a brief overview of the steps of the new standard that must be met to recognize revenue.
1. Identify the contract with a customer: This step focuses on identifying when your organization has entered into an agreement that creates enforceable rights and obligations.
2. Identify the performance obligations in the contract: Performance obligations are promises within a contract to transfer a good or service. This might be as simple as selling 100 widgets, or it might involve service contracts, warranties, bill and hold agreements, and other activities that can significantly complicate the process.
3. Determine the transaction price: The transaction price is what your organization will receive for fulfilling your performance obligations. Again, this can be as simple as getting paid $100 for the 100 widgets, but it could include variable consideration, significant financing components, noncash considerations, or payables your organization has with the customer.
4. Allocate the transaction price to the performance obligations in the contract: If the contract has more than one performance obligation, then you must allocate the consideration received among the obligations. This is done based on standalone selling prices for each individual obligation. Discounts between the total standalone prices as compared to the transaction price for the contract should be allocated among all the obligations unless the discounts are specifically related to one of the obligations.
5. Recognize revenue when the entity satisfies a performance obligation: The final step is to recognize the revenue that has been allocated to each performance obligation as those obligations are met.
There is also additional guidance on disclosures and costs to obtain or fulfill contracts. Some industries will not see major changes in how they recognize revenue, but they will still need to update documentation of how revenue is recognized to ensure it is in compliance with the new standard.
FASB has set up the following website to help in the transition as well:
If you have questions as you prepare this year for implementation of the new standard, please reach out to your accounting service providers to ensure you are ready when the transition hits.
Benjamin R. Ripple Partner, Assurance Practice Leader, CPA
Ben is a partner in BRC’s assurance services. Since starting his career in 2001, Ben has worked with clients ranging from family-owned companies, to multinational corporations, to not-for-profit and governmental entities requiring A-133 audits. Ben’s industry experience includes: Manufacturing and distribution Hospitality, including restaurants and hotels Investment companies Governmental and not-for-profit entities Affordable housing […]