Revenue recognition

ACS 606 and IFRS 15 Revenue Recognition Rules Are Coming

Are You Prepared? Intacct Has You Covered.

In May 2014, FASB issued Accounting Standards Update (ASU) 2014-9, Revenue from Contracts with Customers (Topic 606). At the same time the International Accounting Standards Board (IASB) also issued International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers. In doing so, these two governing bodies largely achieved convergence, with some very minor discrepancies. These converged standards for revenue recognition go into effect the beginning of 2018 for public entities, and in 2019 for privately held organizations, bringing very significant changes to financial statements and reporting for any company doing business under customer contracts. And of course with these changes come new audit challenges.

“The core principle is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”

Source: FASB ASC 606-10-5-3 and 606-10-10-2 through 10-4

As a result of these changes, revenue is no longer recognized on cash receipt, but instead on the delivery of performance obligations. In summary, there are 5 steps:

  1. Identify the contract with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price for the contract
  4. Allocate the transaction price to the performance obligations
  5. Recognize revenue when or as the entity satisfies the performance obligation

Sounds simple enough, right? Not really. Unless your business is dead simple and you operate on a completely cash basis, the process of billing, accounting for and forecasting revenue, in conjunction with expense and revenue amortization and allocation has never been simple. But with these changes, it is about to get harder – at least for a while.

Why? First of all, while you can prepare for the change, you can’t jump the gun. You can’t recognize revenue based on the new rules until those new rules go into effect in 2018. At that point public entities must report under the new guidance and private companies can, but they have an additional year before they are required to do so. So any public entity better be ready to flip the switch, so to speak. But flipping the switch doesn’t only mean recognizing revenue in a new way. For any contract with outstanding, unfulfilled obligations, you also have to go back and restate the revenue for prior periods under the new rules. And for a period of time, you will need to do dual reporting: old and new. In addition, when contracts change, this can potentially have an impact on revenue previously recognized, including reallocation and amortization of revenue and expenses.

If you are managing billing, accounting and/or revenue forecasting with spreadsheets today… good luck. If you are an Intacct customer, luck is on your side. Earlier this week Intacct announced a new Contract and Revenue Management module. Intacct claims it is the first solution to fully automate the new complexities created by ASC 606 and IFRS 15. They are certainly not the only company working on it. In fact QAD (which targets a completely different market: the world of manufacturing) highlighted its efforts in its own event in Chicago recently. But I have to say, Intacct seems to be right out front leading the charge in helping companies deal with what is sure to be a complex and potentially disruptive transition.

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