Few topics are as rabidly discussed by accountants and investors alike as revenue recognition is, yet the conversation surrounding that subject is often clouded by misinformation and confusion. In today’s digital age, accountants are finding it incredibly challenging to find accurate information about forthcoming regulatory changes, and few seem to know what to expect when it comes to revenue recognition in 2018.
So how exactly will the new year reshape revenue recognition, and what should you be doing to prepare yourself and your firm? Brush up on the facts, and arm yourself with reliable sources, and you won’t be taken by surprise when new standards from a new year are implemented.
Finding the facts
The Financial Accounting Standards Board’s forthcoming new standard isn’t too complex to grasp; for the most part, it mainly dictates what accountants and firms should consider revenue to be. In 2018, the FASB is urging accountants to consider revenue to be the sum total of what they expect to receive from their clients in exchange for the services they offer, and will essentially apply to every transaction you have with virtually every customer under your purview.
Still, when it comes to financial standards, nothing is ever as simple as it first appears. That’s why you shouldn’t be afraid to take a deep dive into a full-throated analysis of the forthcoming rules, so that you’re adequately prepared when they roll around. Alluring political topics like tax reform, immigration, and healthcare may nab the media spotlight the most often, but financial standards remain incredibly important to our society’s function regardless of how little attention they receive in the mainstream press.
While you should be reading up on the more nitty-gritty details of the forthcoming standards, you shouldn’t be afraid to refamiliarize yourself with the basics, either. Have a grasp on when the effective dates for these new standards are, for instance, if you don’t want to make a simple mistake that could end up costing you or your company money and prestige.
Few people like bending over backwards to meet the demands or new regulations or standards, but the truth is that more specific revenue recognition rules are long overdue. There is perhaps nothing more important to investors who are considering backing a company than its revenue stream, and a failure to clearly outline your company’s revenue could cost you dearly in the marketplace. That’s why accountants and investors alike shouldn’t view the 2018 changes to revenue recognition as yet another needless hurdle, but as a much-needed improvement to the entire industry of financial reporting.
Preparing for the changes
Even though you’ve brushed up on the facts, you still have quite a bit of work left in front of you. The hardest part of dealing with new revenue recognition standards is figuring out how you’ll implement them, especially if you've recently decided to form an LLC. This might necessitate a lengthy review of your entire operational process. Luckily for you, plenty of implementation guides exist to help steer you on your pathway towards successful compliance with the new standards.
Deloitte’s excellent implementation guide, for instance, is a must-read for anyone who feels uncomfortable or unfamiliar about the forthcoming changes to revenue recognition standards. Figuring out what key players in the industry are doing will help you formulate your own roadmap, and help you avoid common pitfalls that may otherwise have ensnared your company.
One of the most important things you need to do to be compliant with the new standard is review your existing contracts, and determine the transaction price you’ve previously agreed upon with your customers and clients. Countless companies have made the mistake of not including noncash considerations in their analysis of their existing contracts, a frequent mistake that can often trip you up when it comes to ensuring you’re totally compliant.
You’ll also want to ensure that both you and your customer or client have satisfied the various performance obligations listed in your contract, given that a failure to do so wouldn’t allow you to receive revenue for services rendered or goods delivered. Of course, before you try to take a deep dive into your own finances, you should also be considering how your industry – and its various standards – differ from others.
While FASB’s new standards are aimed at enhancing comparability across industries, it’s clear to anyone in the business world that one realm of the market can be vastly different from another. While it’s useful to study the steps other companies have taken, then, it’s also important to remember that your industry’s standards may be wholly different from another’s.
As the new year rolls into full swing, don’t be caught off guard by new revenue recognition standards. Trust the heeded advice of experts, and prepare your team for the challenge ahead, and you can rest assured that you’ll be compliant with the new standard.
Gary Eastwood is a CPA licensed senior accountant from Seattle, Washington. He received his CPA license from the Washington State Board of Accountancy in 2001 before relocating to Onawa, Iowa in 2008. Over more than 15 years of accounting experience, Gary has worked with multinational health service providers and independent CPA firms. He has a proven ability in dealing with business clients from a variety of backgrounds as well as leading companies to greater efficiency and profitability. He is familiar with both US GAAP and China GAAP.