FASB and IASB have new accounting standards that converged the 2 sets of standards – and will change the way many U.S. companies recognize revenue on their financial statements. This convergence of standards could have a significant impact on existing processes, reporting and systems for revenue recognition.
FASB’s Revenue Recognition changes may impact a number of areas including revenue streams with multiple deliverables and the way in which revenue is allocated to those deliverables. Also, the timing of recognition of revenues and other areas will change such as the accounting for collectability, contingent revenue and accounting for contract costs & sales commissions. These changes are likely to impact key financial measures and ratios for U.S. Companies.
An example of a change is in accounting for Revenue arrangements, where a portion of the revenue is contingent (e.g. royalties). Currently, U.S. Companies may wait until contingent amounts are known, and book the actual amount when the contingency is resolved. Under the new approach, companies that have predictive experience with such arrangements may be required to make an estimate of the contingent revenue. The increase of such revenue estimates means that companies will need to track those estimates over the life of a Revenue arrangement and periodically revisit those estimates to determine whether facts and circumstances indicate that an adjustment to revenue is appropriate.
There are a number of benefits to the new Revenue Recognition standard, particularly with industry specific guidance—such as the software industry. Software companies have frequently constrained certain business practices to avoid an unfavorable impact to the manner in which revenue is recognized. In software and other specific industries, U.S. Companies will receive an accounting answer that reflects the economics of the transaction, a situation that doesn’t always happen under today’s standards. That said, the new flexibility the Revenue Recognition standard offers makes challenges for management and back office accountability—such as detail tracking estimates and ensuring such arrangements are properly accounted for under the new Revenue Recognition.
Companies will need to reevaluate their business processes and systems to determine what changes need to be made to enable the judgments and estimates required under the new Revenue Recognition. Navigating the complex and changing revenue guidance – and applying it to the specific facts and circumstances around a business – requires a deep understanding of the applicable standards, technical fluency and a rigorous business focus.
While the new FASB Revenue Recognition standard won’t take effect until after December 15, 2016, many U.S. companies are starting their preparations now. With preparation, the impact of financial statements and related bank compliance will be considered and discussed before implementation for 2017.
For more information on the changes coming to Revenue Recognition, please contact a Smolin professional at 973-439-7200.