Changes in Revenue Recognition requirements – What’s happening and why does it matter now?

Co-authors:
Michele Juliana, Principal, Technology and Management Consulting
Michael Romano, Partner, Finance and Accounting and Outsourcing

If you are a technology or life sciences company, there’s a high likelihood you will be significantly impacted by new standards on revenue recognition recently adopted by the Financial Accounting Standards Board (FASB), commonly referred to as ASC 606.  Mid-sized and growing businesses are particularly impacted as most don’t have the dedicated resources and systems in place to easily support these changes.

Although the issues are somewhat complex and vary by industry, this article aims to provide an overview of the key concepts and some critical elements you should be thinking about now before the changes take effect (see timing outlined below).  More detail is available through the link below and should be discussed in depth with your accounting firm and technology providers to ensure that you understand the implications and have a strong transition plan in place as soon as possible.

Revenue recognition: Overview of ASC 606

Timelines

  • Public entities: No later than year beginning January 1, 2018
  • All other entities with a calendar year end: No later than year ending December 31, 2019

Core Principle

The core principle of the guidance in ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

A new five-step process has been identified to support this core principle, along with extensive guidance on how these steps should be applied to your particular business model.

Key issues being affected by the changes

Below is a quick summary of just some of the areas which must be addressed in this evaluation, and are likely to change.  More detail on the impact of all of these is provided in this white paper – Changes to revenue recognition in the technology industry.

  • Determining whether a contract exists
  • Evaluating collectability and price concessions
  • Accounting for contract modifications
  • Identifying the units of account
  • Accounting for variable consideration
  • Accounting for a significant financing component
  • Allocating the arrangement consideration or transaction price to the units of account
  • Determining whether revenue should be recognized over time or at a point in time
  • Accounting for licenses and rights to use intellectual property (IP)
  • Accounting for certain nonrefundable upfront fees
  • Accounting for customer acquisition and setup costs

What to be thinking about today

The bottom line is that you need to be thinking about this now, working through each of the items below and ensuring that your company is allocating the time and resources to support this important transition.  As always – people, process, and technology all need to be aligned to ensure success.  Consider the following five key items as next steps to ready yourself for this important transition:

  • Develop a clear transition plan now – don’t delay any longer
  • Assess the impact on your financial statements and business
  • Develop your new methodology
  • Provide thorough education for internal personnel on both transition and implementation
  • Ensure internal systems can support these changes, including:
    • Flexible revenue management engine, including the ability to identify all elements of your contracts and manage them independently
    • Granular reporting capabilities
    • Ability to recognize revenue simultaneously under both standards during transition period (optionally, depending on transition method)

To learn more, please visit rsmus.com.


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