Rewriting Revenue Recognition
Have you heard about the new revenue recognition standard (ASU 2014-09, Revenue from Contracts with Customers and IFRS 15, Revenue from Contracts with Customers)? You probably have, but even if you have heard about it and read a few articles or white papers, chances are you aren’t certain what it means for your company. If that’s the case, you are not alone. In my conversations with controllers and auditors over the past several months, it’s clear that very few feel prepared for the new standard.
At a high level, the goal of the new standard is to bring GAAP and IFRS into alignment with each other; remove inconsistencies in existing revenue requirements; improve comparability across entities, industries and capital markets; and simplify the preparation of financial statements by reducing the number of requirements an entity must refer. More specifically, the new standard demands an organization to take the following steps:
- Indentify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price
- Recognize revenue when or as the entity satisfies a performance obligation.
Revenue is recognized when a company satisfies a performance obligation by transferring a promised good or service to a customer.
Like all substantial changes to accounting standards, the impacts will be far reaching and potentially disruptive impacting policies & procedures, internal controls, current and future contracts, compensation structures, financial performance metrics, loan covenant compliance, as well as determining what other impacts will need to be addressed. Preparing for these changes will require a systematic approach. Teams will have to be assembled. Budgets will have to be allocated. A project plan will have to be built. Gap analyses will have to be performed.
Unfortunately, implementing the new standard will not be the end of the journal for most companies. The entire company will have to undergo training. Sales and Business Development will need to understand the impacts of the new standard when negotiating deals, Legal will have to be educated on the nuances of the new standard, Audit will have to update their internal controls and SOX templates and reevaluate their risk matrices, Operations will need to be provided guidance on contract performance requirements necessary to recognize revenue. And, it goes without saying that the Accounting department will need to thoroughly understand the new pronouncement.
There is a lot of work ahead to be ready for the new Revenue Recognition. If you are like many of the people I have spoken with, you are not alone, but you also don’t have much more time. These large projects always have unexpected surprises and always seem to take much longer than anyone expects. Now is the time to start educating yourself.
While a lot of this sounds similar to the standards we have today, in upcoming blogs, I will dive deeper to discuss what’s new and what’s different and what others are doing to get ready.