Organizations are scrambling to prepare for new standards set forth by both national and international accounting regulators. New standards ASC 606, set forth by the Financial Accounting Standards Board (FASB) and IFRS 15, set forth by the International Accounting Standards Board (IASB), which will change the way that organizations will report their contract revenues.
According to an AICPA brief on the guidance, businesses—generally in the Aerospace, Communications, Defense, Engineering, Law, Media, Information Technology, Management Consulting, Marketing Services, and Pharmaceuticals industries—have a challenge ahead to stay up to date with the update and to properly recognize and report revenues under the new standards.
As this new standard is established, these companies will have to recognize revenue correctly or risk audits and the need to re-file earnings. We look to share with you some of the basics of the new standards: what you need to know, how they affect you, and how you can best manage “performance obligations” and event-based revenue.
Background: The Passing of ASC 606 and IFRS 15
In May 2014, FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), and the International Accounting Standards Board (IASB) issued International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers.
Public entities are required to adopt the revenue recognition standards for reporting periods beginning after December 15, 2016, and interim and annual reporting periods thereafter (which equates to January 1, 2017 for public entities with a December 31 year-end). Early adoption of ASU 2014-09 is not permitted for public entities.
Nonpublic entities are required to apply the revenue recognition standard for annual reporting periods beginning on or after December 15, 2017, and interim reporting periods within annual reporting periods beginning after December 15, 2018. Alternately, nonpublic entities can elect several variations of early adoption not earlier than public entities.
Definitions to Know
Blue Hill, a leading analyst firm, recently shared a document on best practices in recognizing professional services contract revenue under ASC 606 and IFRS 15, noting the following definitions and requirements:
- Revenue is recognized based on defined “performance obligations,” which can be thought of as being similar to deliverables in multi-element revenue recognition.
- Each performance obligation must be accounted for distinctly as a standalone good or service and as defined within a contract.
- The full transaction price can reflect variable amounts that are “probable” of not having significant reversals based on prior experience with similar delivery arrangements. The transaction price should also reflect the time-value of money if financing is a significant project component.
- Revenue should be recognized as each performance obligation transfers goods or services to the client. This transfer can be determined as either a point in time or over a range of time, based on the agreement, but will also require appropriate reallocations and deferrals as each obligation and timeframe passes.
- Public business entities, certain not-for-profit entities, and certain employee benefit plans must follow these standards for annual reporting periods beginning after December 15, 2017.
- All other companies are required to follow these revenue recognition standards for annual reporting periods beginning after December 15, 2018.
- Early application is permitted for annual reporting periods beginning after December 15, 2016.
The Dangers of Misstating
In March of 2016, Tangoe declared the need to restate professional services revenue from 2013 – 2015 based on inaccurate usage of ASC 605-25, ASC 985-605.
This led to the resignation of the CFO based on the preferences of the Board. To avoid similar problems that will inevitably arise as companies have to shift revenue recognition standards over the next two years, companies need to start doing their homework now.
For more information, including recommendations and takeaways, see the Blue Hill Research insight, Intacct Leads the Way in ASC 606 and IFRS 15 Revenue Recognition.
Video: Intacct for ASC 606/IFRS 15 Compliance
Intacct announced new functionality to stay up to date with the new standards, becoming the first of its kind to offer an automated solution to help companies navigate the complexities created by the upcoming ASC 606 and IFRS 15 standards. The video below shares how Intacct will help your organization to prevent the overwhelming complexities that would otherwise occur if your company relied on manual processes.
If you’re a subscription-based business or services firm, it pays to do your due diligence before this standard takes full effect. Contact Brittenford today to learn more about preparing for the changes that will affect your business tomorrow.