The Time is Now
February 5, 2019 § Leave a comment
The year 2020 sounds like a long time from now, doesn’t it? I have three young children so when I think about the future, I’m excited to think about having two of the three out of diapers by 2020! Besides possibly spending less money on diapers, the year 2020 will be significant for me, as a CPA, since that is the year that the new revenue recognition will become effective for non-public companies.
The new standard requires a five-step approach to revenue recognition; these steps are as follows:
- Identify the contract with a customer
- Identify the separate performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the separate performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies a performance obligation
On the surface, these steps don’t seem overly complex and may not seem much different than what is currently done to determine revenue recognition. However, the new guidance requires an evaluation of all existing contracts and focuses on the transfer of control of goods or services. In addition, the new guidance requires extensive disclosures.
The adoption of this new guidance can be time-consuming and cumbersome. The new guidance applies to all contracts with customers, except those within the scope of other standards, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees (other than product or service warranties), and certain nonmonetary exchanges between vendors.
The new standard will not only impact accounting, but may bring changes to the financial statements that could have wide-ranging impact on a company, from bank loan needs to timing for bonuses and other compensation incentives. In some industries, such as health care, pharmaceuticals, and software development, the impact of the new guidance on the timing of revenue recognition may be significant enough for companies to begin to change contracting practices with their customers.
The implementation of the new guidance will be more intensive for some companies than others, depending on the industries they operate within, the size and structure, and the complexity and standardization of contracts.
The new standard introduces new concepts, such as estimating transaction price, that require significant judgment. This will require companies to develop process around these areas to ensure a consistent approach is followed for the various revenue streams and various business functions of the company.
Don’t underestimate the work that is involved with adopting the new revenue recognition standard. Now is the time to contact your accounting professional, develop a plan, and take action to ensure your company is ready by 2020….and I’ll get to work on the potty-training!
Wendy Moran, CPA, Partner