New Revenue Recognition Standard
Companies are in full swing of implementation, take note of challenges
As executives of companies start to update their revenue recognition procedures in light of the new revenue recognition standard, many have seen the requirement for proper planning and preparation to be necessary. Contract reviews appear to have topped the list of concerns by these companies. This is an important element of transition activities, and it becomes more time-consuming for companies as the number of individual and non-standard contracts increases. The volume of nonstandard contracts may be surprising to some CFOs.
If your business is not contract-based, you’re not out of the woods just yet. Even without contracts to review, there is plenty of documentation and analysis required to implement the new standard, and producing those documents could require more effort and energy than just reviewing them. Even the simplest business structure requires thorough and well documented analysis to determine how the new standard will impact the business, if any.
Revenue recognition is often a critical and complex accounting area that companies cannot afford to get wrong. Many stakeholders – both internal and external, including investors or bankers – will want to know what to expect and potentially see the supporting analysis behind it. As some would say: “document, document, and document!”
The updated guidance also enhances the related disclosure requirements, regardless of whether the new standard has any impact to your business. The objective of the disclosure requirements in the standard is for an entity to divulge sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Companies have noted that it is taking a significant amount of time to work through. Some of the new disclosures will include disaggregation of reported revenue and further information about the company’s specific performance obligations. In addition, significant judgments used to determine revenues will need to be explained, particularly those regarding:
• The timing of satisfaction of performance obligations
• The determination of transaction price and how it’s allocated
Consider yourself asking this question: “What are the new disclosure requirements for this business and are there systems and processes in place today to capture this data?”
A great deal is on the line, and the new standard could affect third parties’ (such as investors) perceptions of a company’s overall financial performance. Use this moment to unlock value from the required change by translating compliance into operational improvements.
The truth is that the difference between complying on time and falling behind could be razor thin. Now is the time to focus sharply on preparing for the implementation!