It’s what most organizations strive for and what executive teams focus on. How complicated can it be to recognize? You enter into a contract and/or receive cash from a third party for services rendered. That’s revenue, right?
Well, not exactly.
Prior to ASC 606 (ASU 2014-09 Revenue from Contracts with Customers), revenue recognized may have varied based on industry and other factors. ASC 606 was established to create more consistency. This standard is applicable to public, private and non-profit entities. Although it went into effect in 2018 for most public companies, most private companies and non-profit entities are “revving” up for implementation in 2019.
What do you need to do to determine if there is an impact?
Assessment and Implementation
The concept of ASC 606 is to recognize revenue in alignment with transfer of goods and/or services. First, you need to assess contracts and/or revenue arrangements for your organization.
- Gather customer contracts and list revenue sources/arrangements to obtain complete population of activity that generates revenue and contracts/arrangements that describe how the revenue transaction is based, as applicable.
- Identify why the organization is receiving the revenue – why someone is paying you for a product and/or service. The terminology used in ASC 606 is “performance obligations.” For example, is the activity a point-in-time activity with no lingering obligations such as sale of goods or, perhaps, does a warranty exist as related to the sale of an item? Do the services to be provided occur over a period of time?
- Determine how much the organization expects for the services/goods, referred to as the “transaction price.” The price could be a fixed price or have a variable element, such as a discount, refund, and/or incentive.
Not done yet…
- Once you have the three items above, you need to consider for each “performance obligation,” how does the transaction price apply? If one item is to be sold with no refund/recourse, revenue may be recognized at time of sale. The objective in this step is to allocate the price to each “obligation.” While this concept appears to be straightforward, a thorough review needs to be performed considering the obligations to be provided and the period of time in which this occurs.
- Finally, recognize revenue as the obligation is met/provided. The revenue may be over a period of time or at a point in time, establishing accounting policies and procedures to ensure revenue is recognized appropriately.
Opportunities from Revenue Recognition
The change in revenue does provide opportunities to:
- Reestablish policies and procedures;
- Review contracts and the intent of “revenue” with operational personnel;
- Reassess provisions and/or modify language to ensure the business goals of the organization are being met in the area of revenue and revenue recognition.
If your financial statements are prepared according to generally accepted accounting principles, you should be starting your assessment immediately to avoid audit issues and/or delays and be proactive in communication with your auditors or accountants. If your statements are sent to banks or other entities, you will need to make sure you have appropriately adopted the standard. Changes in processes and procedures should also be communicated to your tax team. Systems may also need to be modified to create efficiencies in the recognition process.
P&N has a technical accounting team ready to help organizations through this process. Whether you need implementation assistance, an ongoing resource, or help assessing process and/or system changes, P&N is revved up for revenue recognition!