Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, is likely one of the most important standards we have seen from the Financial Accounting Standards Board (FASB) in recent memory. The core underlying principles of the standard, which apply to all companies with financial statements based on Generally Accepted Accounting Principles (GAAP), are to:
The new standard eliminates the concepts of earnings and realization and introduces new concepts, such as transfer and entitlement:
Importantly, the new standard will impact almost all contracts with customers, excluding lease contracts, insurance contracts, financial instruments, guarantees (other than product or service warranties), and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.
The standard results in a five-step process to follow when recording revenue:
While all non-public companies will need to comply by January 1, 2019, there is a lot to prepare for now. You currently should be compiling a list of contracts to identify as standard, unique or complex, and documenting revenue recognition policies for revenue streams under existing GAAP. Of course there are additional steps to be prepared. See below for a timeline of milestones your company should strive to achieve.
Perform a GAAP assessment of your company:
There are many steps to take to help ensure you are ready to implement the new revenue recognition standard on your company’s 2019 GAAP financial statements. First and foremost, familiarize yourself with the new standard via articles, trainings, webinars, etc. Then collaborate with your accounting service team to assist with the preparation and implementation. Being proactive will help provide a smooth implementation in all areas in your organization affected by this new standard.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.