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Beginning in 2019, private companies following U.S. Generally Accepted Accounting Principles (GAAP) must comply with the new revenue recognition standard. Meeting the requirements for these standards requires a great deal of work, so if you haven’t started implementing them, now is the time to do so.
What we know
Public companies were required to follow the new standard starting in 2018, giving us a picture of what the implementation looks like. It seems that even if the new accounting did not dramatically change the top line number reported on their income statements, it changed the method in calculating it. Contracts had to be combed through, and paper trails were required to back up estimates to auditors. Most companies reported that the standard was more work than they had anticipated. The same challenges should be expected for private companies adopting the standards.
Private companies must start following Accounting Standards Update (ASU) no. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606), for their first financial statements in 2019. For private companies with a fiscal year end or who publish quarterly statements under U.S. GAAP, this could be within the next few months. Other companies have until the end of year, and some even until early 2020 to comply with the standards.
The revenue recognition standards have erased a great deal of industry-specific revenue guidance in U.S. GAAP, with the goal of creating the following five-step model for revenue recognition for most businesses globally:
- Identify the contracts with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocation the transaction price to the performance obligations
- Recognize revenue as the entity satisfies the performance obligation
Often, the new guidance will not change the revenue a company reports, but the timing of when revenue is recorded will be affected, especially for long-term, multi-part arrangements. In order to determine how and when to report companies must also assess:
- The extent by which payments could vary due to factors such as bonuses, discounts, rebates, and refunds
- The extent that collected payments from customers is “probable” and will not result in a significant reversal in the future
- The time value of money to determine the transaction price
The result is a process that offers fewer bright-line rules and more judgment calls compared to old U.S. GAAP.
Our accounting experts can help to implement these new policies in a timely manner to avoid a crisis right before your implementation deadline. We are aware of best practices learned from public companies that made the switch in 2018.