by Jagruti Solanki on May 9, 2016
With the new revenue recognition standards upon us and adoption for public entities right around the corner, we’re finding that two aspects are tripping our clients and prospects up more than any other - variable consideration and the time value of money.
For both public and nonpublic entities, three basic transition methods are available —1full retrospective, retrospective with certain practical expedients, and a cumulative effect approach.
Public entities will apply the new standard for annual periods beginning after December 15, 2016, including interim periods therein. Early adoption is prohibited. Therefore, a calendar year-end public entity would reflect the new standard in its March 31, 2017 first quarter, each subsequent quarter, and also in the year ending December 31, 2017.
Nonpublic entities have an additional year to adopt, i.e., the new standard applies for annual periods beginning after December 15, 2017. In addition, the new standard is effective for interim periods within annual periods that begin after December 15, 2018. Therefore, a calendar year-end nonpublic entity would first apply the new standard for the year ended December 31, 2018. If it also prepares interim financial statements, the new standard would first take affect for those interim periods in 2019.
The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled.
5 Step Approach
1. identify the contract with the customer
2. identify the performance obligations in the contract
3. determine the transaction price
4. allocate the transaction price to the performance obligations in the contract
5. recognize revenue when (or as) the entity satisfies a performance obligation.
Companies across all industries will use a new five-step model to recognize revenue from customer contracts.
The following areas may be significantly impacted:
Management should familiarize itself with the new standard and begin evaluating its potential impact on each specific revenue stream of the entity, such as the sale of goods vs. the provision of services.
FASB/IASB Joint Transition Resource Group – The TRG was designed to discuss emerging issues and to inform the Boards about interpretive questions that are likely to arise as implementation efforts commence.
Softrax - Has over 15 years of working with companies trying to bring their business up to speed with the latest guidance, we're happy to offer a modular, open-ended solution that can handle new revenue recognition needs without the need to change or replace the systems your company most relies on. We can even help you understand the potential impacts to your accounting processes, working with you to develop an implementation strategy that ensures your business is ready to meet the challenges of ASC 606 and beyond.