In May 2014, new rules were implemented regarding how revenue is recognized for reporting purposes. The Financial Accounting Standards Board (FASB), released Accounting Standards Update 2014-09, Revenue from Contracts with Customers.
This far-reaching change can potentially alter how most businesses operate and will substantially affect those businesses that enter into contracts with customers.
The updated standard no longer has rules by industry; it instead implements a principal-based approach.
Revenue Recognition Steps that Must Be Taken by NJ Businesses
With the updated approach, five steps must be completed in order to recognize revenue:
- Identify contracts between your organization and customers.
- Identify what performance is required by the contract.
- Specify the price for the goods and/or services provided for in the contract.
- Determine what portion of the overall price is determined by each outlined performance.
- Revenue is recognized as each required performance is completed.
Organizations that provide goods or services at one time may see only a small impact in the way they account for revenue. Other organizations, such as those in the fields of construction, real estate and telecommunication, may see a significant impact in the way revenue can be recognized.
Implementation Timeline
The new rules regarding revenue recognition do not go into effect until 2016 or 2017 depending on the organization. However, given the changes to reporting and disclosures as well as the potential impact to daily operations, it is important that businesses prepare well in advance of the implantation date. Failing to plan for these changes can have a negative impact on your business’s performance and adherence to federal requirements.
Given the broad nature of these changes and the intricacies involved, it is best to use the services of accounting professionals to roll out the implementation process. Whether your organization is working with outside professionals or managing the change in-house, it is important to plan ahead.
In order to take the necessary steps to adhere to the new revenue recognition standard, organizations should take the following steps:
Step One: Assign Ownership
The first step is to identify which individuals in the organization are responsible for understanding the new revenue recognition standard in NJ and implementing the necessary changes. Depending on the needs of your organization, this may be one individual, a team of individuals that work together on a task force or an outside consultant.
Step Two: Make Comparisons
In order to implement the new revenue recognition standard, NJ organizations must identify how the changes in accounting principles will affect preexisting revenues. It is important that the responsible individuals consider how the revenue recognition changes will impact various areas of the organization including:
- Contractual arrangements.
- Accounting practices.
- Reporting and company financial statements.
- Tax implications on a federal and state level.
- Changes to internal audit procedures.
- Adapting sales practices to confirm to the new standards.
- IT changes, including updating software in order to track the new revenue recognition requirements.
- Performance management adjustments to more closely align with the revised way of recognizing revenue.
This step can take extensive research and requires a thorough understanding of the new standard and of your organization. That being said, businesses should allot a significant amount of time to completing this step.
Step Three: Create a Plan
Once your organization has a full understanding of the updated revenue recognition standard, it is important to create a plan for implementation. It is also important to consider how the company will retroactively adjust revenues as required and how to document the restated financial statements.
The plan should also provide a guideline for the remaining steps as well as an estimated timeline of completion.
Step Four: Update Systems
Many NJ organizations will find they need to update systems in order to accurately report according to the updated revenue recognition standard. Depending on your software, you may only need an upgrade or update to conform to the new standard.
For others, the updated revenue recognition standard will require new software that has the necessary reporting capabilities. It is important that the software enable you to restate previous financial reports and compile disclosure data as required by the new standard.
Step Five: Identify Disclosures
A number of disclosures are required as a part of the new revenue recognition standard. This includes both disclosures made once the rule goes into effect and disclosures that are required in the interim. This will help to ensure your NJ organization is prepared to roll out the necessary changes.
Step Six: Update the Plan
An organization’s plan for implementing the new standard should be a living document and should be updated regularly to reflect the progress of the project. As a part of the plan update, the responsible individual or task force should create a training plan for all impacted employees. The change in revenue recognition can potentially have a significant impact on the way your organization does business and recognizes performance. Therefore, all affected employees should be aware of the changes and understand how the change in reporting affects their goals and objectives.
Step Seven: Inform Stakeholders
Once research is complete and an action plan is in place, all stakeholders should be made aware of the changes and the expected impact to the organization. For some organizations, if the changes are significant that stakeholders must have a clear understanding of what to expect and how the changes will be taken care of from an operational standpoint.
Any change to business operations as a result of the change to revenue recognition standard will be a complex task. As such, it is smart to have a knowledgeable, qualified accounting team on your side to provide the support and guidance necessary to implement changes while minimizing the disruption to your business.
