Frequently Asked Questions about Revenue Recognition
When ASC 606, Revenue from Contracts with Customers, was first introduced in 2014, it was obvious it would be one of the most influential accounting policy changes in recent history. This new accounting standard replaces almost all existing frameworks for recognizing contract revenues. Even though the new framework appears simple at first glance, some business owners, executives and managers are unsure about the best way to implement the changes and which processes will be most impacted. In fact, after several years there continues to be questions about the process including how employees and external relationships will be impacted. As the implementation deadline draws near, it’s essential to become familiar with the new standard to make the needed changes. To help our clients, prospects and others understand the most essential aspects of revenue recognition, Hanson & Co has provided a summary of the most common questions asked about the change below.
What Key Changes Occurred with Revenue Recognition?
ASC 606 introduces a five-step process for recognizing revenue:
1. Identify the contract with the customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) performance obligations are satisfied.
What Entities Need to Comply with the New Standard?
All entities that follow Generally Accepted Accounting Principles (GAAP) should comply with the new standard. This includes public companies, several private companies, and even some not-for-profit organizations.
When Does It Go into Effect?
The accounting standard has multiple different implementation deadlines.
Annual and Interim Reports
All reports for reporting periods that began on or after December 15, 2017 should have been filed using the new standards.
PRIVATE ENTITIES & NONPROFITS
Annual reports for reporting periods that begin on or after December 15, 2018 should be filed using the new standards.
Interim reports for reporting periods that begin on or after December 15, 2019 should be filed using the new standards.
What are the Risks?
A crucial aspect of ASC 606 is the required disclosures. Don’t overlook them. They should be both quantitative and qualitative, and they should support the numbers that are reported in your financials. They should report information like:
Revenues on a disaggregated basis, grouped by type of service, geographical region, contract duration, etc.;
Value of contracts at year-end;
How contract performance relates to the timing of payments;
Assumptions and judgments made by management; and,
Details about performance obligations.
Regulators will be looking closely at disclosures, so don’t let them take a back seat.
When Should We Start Adoption?
We recommend that you start now – today, even. If you have not taken any steps toward applying this new methodology, start with the basics. First, fill in the gaps of your knowledge. Ask questions, read articles, or call your accountant. Next, figure out what a successful result would look like. What will a successfully-implemented standard look like on your financials, your employees, your procedures? And finally, create attainable goals spanning from now until the implementation deadline to help you reach that result.
The changes outlined in the new revenue recognition standard require companies to make important process changes in both the accounting and other areas of the company. While it’s not an overnight process the good news is that with proper planning companies will be able to make the needed changes in a gradual manner. If you have questions about the new revenue recognition standard, how to implement it at your company, or need assistance with an audit or tax issue, Hanson & Co can help. For additional information please call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.