Revenue Recognition

The deadline for private companies to adopt the new revenue recognition standard is rapidly approaching.

The new standard (ASC 606, Revenue From Contracts With Customers) replaces nearly all current revenue recognition guidance and requires companies to evaluate contracts against a new five-step model. All U.S. GAAP nonpublic entities are required to adopt the new standard for annual reporting periods beginning after December 15, 2018. For nonpublic entities that report under IFRS, there is a similar new revenue recognition standard (IFRS 15) that is effective for periods beginning on or after January 1, 2018. We encourage organizations to take steps now to gain a greater understanding of the new guidelines, educate management and key stakeholders about the potential impacts, and prepare for a successful implementation.

The core principle of the new guidance is a company should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration that the company receives or expects to receive. The application of the new standard requires companies to evaluate contacts against the following five-step model:

  1. Identify the contract with a customer.
  2. Identify the separate performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the separate performance obligations.
  5. Recognize revenue as each performance obligation is satisfied.

What's Next?

Adoption of the new revenue standard may seem overwhelming and time consuming for many companies. It is important to have an adoption plan in place that allows for efficient implementation timing, incorporates the highest use of company resources, and provides management with a clear understanding of the changes. Steps to consider as your company begins to evaluate the new changes include the following:

  • Establish an implementation team to plan and effectively manage the process.
  • Evaluate key contracts and revenue streams to begin identifying areas that will have the most impact.
  • Elect the best method of adoption, whether the full retrospective method or the modified retrospective method.
  • Educate and communicate with key stakeholders (including owners, lenders, boards, and others) the significant changes that will impact your company.

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