When it comes to business, sports or life, success is all about timing. The winning play, getting the big project, or meeting the right person are all situations that share a common thread. The same can be said for revenue recognition and how it impacts a company’s financial reporting. Again, timing is everything! When a company recognizes revenue, it has a significant impact not only on financial statements but also taxes, business processes and event contractual agreements. Although it may seem like a minor point to many it’s a critical concept with far reaching consequences. That’s why ASC 606, Revenue from Contracts from Customers, received a lot of attention when it was issued. These new regulations will require companies to carefully review existing accounting, financial reporting and practices to meet required changes. To help clients, prospects and others understand the change and how it may impact them, Barnes Dennig has provided a summary of key points below.
Why the Change?
The need for a consistent set of principles to guide how companies report revenue has been a “hot issue” for accounting regulators for years. In practical application, companies in different industries have been able to revenue recognition principles in an inconsistent manner. This made it increasingly difficult for investors, creditors, capital markets and others to understand a company’s financials. The new standard remedies these concerns and creates a consistent set of reporting principles which apply to businesses across all industries.
When is the Compliance Deadline?
The deadline for implementing the new revenue recognition standards was January 2018 for public entities. The deadline for implementation for non-public companies is January 2019 – a brief time away.
Who Will Be Impacted?
ASC 606 will impact all businesses that provide services using contracts and that have multiple deliverables. However, it is expected that companies in aerospace, automotive, communications, construction, engineering, media, health care, real estate, software and technology will be impacted most significantly.
There are several significant changes where the new standard is different from current practices, including:
- Contract modifications – Under previous regulations contract guidance was specific to industry and transaction types. Under the new ASC 606 regulations, there is a single framework which can be used across all industries. For this reason, the new regulations may require changes to how your company accounts for contract modifications.
- Identification of “distinct” performance obligations – A key change in ASC 606 requires that an assessment of whether a good or service is separately identifiable from others promises in a contract. This requirement, and others, may result in a company changing how it recognizes revenue on bundled goods and services
- Long-term contracts – ASC 606 added specific requirements for when revenue can be recognized over a period of time. Many companies that have used the percentage of completion method to recognize revenue are finding that ASC 606 requires revenue be recognized upon shipment. Also, certain companies, that previously recognized revenue upon shipment, are learning that ASC 606 requires revenue recognition now require revenue to be recognized over an established period.
- Contract costs – In addition to changes in revenue recognition, the FASB also added guidance that requires certain costs associated with obtaining a contract be capitalized.
- Loyalty programs and marketing incentives – Such programs may meet the definition of a separate performance obligation that requires revenue allocation and deferral under ASC 606.
- Promises and customer care programs – If companies have historically provided free repairs or other services outside of a written policy, these implied promises may be considered separate performance obligations under ASC 606 that require revenue deferral.
- Variable consideration – Previous guidance on variable consideration was industry and transaction-specific. ASC 606 creates a single framework as it relates to variable consideration in a contract.
- Warranties – Under ASC 606, warranties that can be purchased separately or provide the customer a service beyond the assurance that the product complies with agreed-upon specifications are generally considered a separate unit of account requiring revenue recognition allocation
- Income tax accounting implications – ASC 606 creates additional differences from accounting methods acceptable for income tax reporting
- The accounting definition of a contract – To recognize revenue, the arrangement must meet the definition of a contract as defined by ASC 606. Revenue from arrangements that do not meet the definition of a contract cannot be recognized, in general, until the consideration is collected and is nonrefundable and all performance obligations are satisfied
- Licenses of intellectual property – There is now a single framework for the recognition of revenue from licenses. Pr. Since numerous types of licenses exist in various industries, ASC 606 is expected significantly impact how many companies account for this revenue.
The impact of the new revenue recognition standards is huge. Many companies will need several months to understand the consequences and identify key changes – beyond accounting – which need to be made. Barnes Dennig has a team of experienced professionals that can guide you through this complex maze of changes. If you have questions about ASC 606 or need assistance with evaluating and implementing modifications, we can help. For additional information please call us at 513-241-8313 or click here to contact us. We look forward to speaking with you soon.