The deadline is approaching for private companies to begin reporting using the new revenue recognition standard, and many may find themselves confronting the new standard a lot sooner than they had expected. Almost all companies will be affected to some extent by the new guidance, though the effect will vary depending on industry and current accounting practices. As amended, the FASB’s standard is effective for non-public entities for the first interim period within annual reporting periods beginning after December 15, 2018.
The core principle of the guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. The application of this principle is carried out in five steps:
Bronswick Benjamin has identified various implementation issues impacting companies across many industries. While FASB has provided guidance to assist companies during this transition, there are numerous challenges to overcome to ensure an integrated implementation. The below developments may provide helpful insight into application of the guidance.
Key components to consider during implementation:
- The standard will apply to a company’s contracts (explicit or implicit) with customers, except for contracts that are within the scope of other standards (e.g., leases, insurance, financial instruments).
- The unit of account for revenue recognition under the new standard is a performance obligation (a good or service). A contract may contain one or more performance obligations.
- A good or service is a distinct performance obligation if the customer can benefit from the good or service either on its own or when combined with other readily available resources
- The transaction price reflects the amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services. This may include an estimate of variable considerations, time value of money and exclude amounts collected on behalf of third parties, such as some sales taxes.
- Common forms of variable consideration include; price concessions, volume discounts, rebates, and guarantees amongst others.
- The incremental costs of obtaining a contract as well as costs to fulfill may be capitalized.
Bronswick Benjamin CPAs & Advisors can guide you through the new revenue recognition process. For more information, please contact Ed Hendry at 847.947.0958 or ehendry@bronswick.com.