What the delay of FASB’s revenue recognition standard means
The revenue recognition rule doesn’t mean that companies should wait to start their implementation efforts.
On July 9, the Financial Accounting Standards Board voted to defer the effective date of its revenue recognition standard by a year, while still allowing companies to adopt the standard as initially planned.
FASB listened to the concerns preparers voiced about the time it would take to implement the new standard, as well as the tardiness of the recently proposed changes (not to mention that other changes not yet proposed are still possible). At the same time, FASB decided against deferring the standard for two years in order to maintain the momentum of implementation and to avoid a difference with the IASB’s proposed adoption date.
This deferral does not mean that companies should wait to start their implementation efforts. The deferral is the recognition of how significant an undertaking the adoption of the standard is.
As a reminder, here are a few things companies should do now to get ready:
- They must consider their existing contracts and identify any features or terms that may require additional analysis under the standard’s five-step approach: for instance, a contract with variable consideration requires more analysis to determine the transaction price than a contract with fixed consideration. As another example, contracts that provide customers with both a good and a service must be assessed to identify the separate performance obligations.
- Companies must evaluate their ability to collect and maintain the data necessary to comply with the standard given their processes and systems:for example, companies may track information at the contract level. Under the new standard, a company may have to either aggregate contracts or separate a contract into parts in order to account for revenue. In addition, the transitional methods in the standard involve retrospective application, which requires companies to gather information about past and outstanding contracts.
- Companies must determine where the standard requires management to make additional judgments, including estimates:in general, the standard requires more judgment from management than under prior guidance because it represents a shift from a detailed, rules-based approach to a principles-based approach. Companies must put processes and controls in place to make these judgments and adequately support them through documentation. In the United States., an entity’s estimates may be scrutinized by the Securities and Exchange Commission or other regulators.
- Companies must review the nature and amount of disclosures required under the new standard to evaluate whether they collect the required information: companies may wish to begin creating a draft of these disclosures.
- Companies must consider whether the changes to the accounting for revenue will affect other areas of the companies’ operations:such as their tax planning strategies, debt covenants, and compensation structures.
- Companies may wish to reconsider the legal structure of their contracts with customers:the substance of a contract, however, takes priority over the contract’s form.
- Companies may reevaluate how their contracts with customers are priced:for instance, a company may decide that its operations will be more manageable going forward if the company updates its contract pricing to better align the timing of billing and the timing of revenue recognition under the new standard. Telecommunications companies often provide customers with a phone when they sign a new service agreement, for instance. Historically, such companies have recognized revenue for both the phone and the service over time as the service is provided. Under the new standard, they may be required to separate the phone and the service into separate performance obligations and recognize certain revenue upfront when the phone is transferred to the customer.
- Companies may also wish to prepare an analysis of how the new standard will affect the company’s bottom line:this analysis will not only give insight to management, but also prepare the company to communicate with stakeholders regarding the potential effects of the standard on its results.
- Companies that expect changes to the timing or amount of their revenue recognition may want to start thinking about which transition method to use: the transition methods available are a retrospective approach with optional practical expedients and a retrospective approach under which the cumulative effect of adopting the standard is recognized at the date of initial application.
- Public companies have to disclose the expected effects of the new standard on their financial statements:these disclosures will have to be refined over time as the date of adoption approaches.
FASB has not yet issued the ASU deferring the effective date of ASU No. 2014-09, but is expected to do so shortly. The International Accounting Standards Board has yet to vote on its proposed deferral of one year.
[cryout-button-color url=»http://incp.org.co/Site/2015/publicaciones/eglobal/revenue-contracts-with-customers.pdf» color=»#47AFFF»]Report: revenue from Contracts with Customers[/cryout-button-color]
Source: CFO – By Anne – Lise Vivier