The new revenue recognition rules have been marching their way toward official existence since May 2014. The transition to the new rules was required in 2018 for public companies, and now most private companies must adopt them by the end of 2020. While that does not leave much time to work on implementation, having a well thought out plan and utilizing other helpful tools should ease the burden.
What does a Revenue Recognition Implementation Plan Look Like?
The focus of the new standard (FASB ASC 606) is recognizing revenue to depict the transfer of goods or services to customers by applying the five-step framework mandated in the new rules. An effective implementation plan might follow a similar five-step process, as follows:
- Education – During this phase, management should obtain an understanding of the new guidance, including industry specifics. Additionally, it is during this phase that management should establish a timeline, assign responsibilities, and determine how they will monitor progress toward completion.
- Planning – This phase involves management obtaining an understanding its current revenue recognition policies, internal controls and systems, identifying its revenue streams, and taking an inventory of its customer contracts.
- Assessment – During the assessment phase, management should read and obtain an understanding of representative contracts encompassing each of their revenue streams. Consider starting with those that might have a material impact. The number of contracts and which ones to initially assess are up to the implementation team. While analyzing the contracts selected, the team should consider the five steps in the new revenue recognition model in order to develop a list of items for follow up in phase 4.
- Evaluation – During this phase, the implementation team dives deeper and evaluates issues such as whether goods or services are distinct, whether delivery occurs at a point-in-time or over time, as well as the impact of contract modifications, variable consideration, principal versus agent considerations, and contract costs. The end goal of this phase is a determination of whether additional contracts need evaluation or whether the implementation team has enough information to proceed to completion.
- Completion – During this phase, management will decide on the transition method, weigh and decide on the practical expedients they choose to elect, and develop the company’s new revenue recognition policy. The revenue recognition staff and management can then apply the policy to all remaining transition contracts and any new contracts going forward.
In addition to having an implementation plan like the one above, following are some other resources to make the process less burdensome.
AICPA Revenue Recognition Industry Task Forces
The AICPA's Revenue Recognition Industry Task Forces have identified implementation issues with revenue recognition across a number of industries, including asset management, broker-dealers, construction contractors, and not-for-profit, amongst others, which you can find here.
Chances are that if you operate in one of the industries identified, the AICPA's material will address your unique situation. If not, public company disclosures may provide a good roadmap that can be used throughout your implementation plan.
Insights from Public Company Adoption
A recent article published in the Journal of Accountancy (Tysiac, 2018), indicated that 87.5 percent of non-early adopters in the S&P 500 chose the simplicity of the modified retrospective approach to transition (as opposed the full retrospective approach which requires recasting all prior periods presented). This may help private companies decide which transition method to apply.
Additionally, in evaluating the public filings of ten recognizable names from the S&P 500, eight out of ten indicated that the impact prior to adoption, as well as the impact on current year revenue, was immaterial or less than a 1 percent change. Although these limited public company statistics point to the immaterial impact of the change, the one area that stood out in researching these companies was the increased length of the disclosures compared to pre-adoption footnotes. Private companies do not have as many requirements; however, they can expect longer disclosures. The good news is that private companies will have plenty of their public counterparts from which they can pull examples.
The earlier you start, the more time you will have to utilize the change in the standard as a reason to evaluate and improve internal controls, systems, and resources. Allow yourself and your company as much time as possible to put an implementation plan in place and take advantage of any tools, information, or other resources available to help reduce the burden.
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