May 28, 2014 was a milestone day in accounting history. The Financial Accounting Standards Board and the International Accounting Standards Board issued the first converged accounting standard – Accounting Standard Update 2014-09 – Revenue from Contracts with Customers (Topic 606). ASU 2014-09 replaces hundreds of pages of existing revenue accounting guidance, much of which represents layers of detailed ad hoc industry-specific rules, with one principles-based standard. Since revenue usually (hopefully!) is the largest number on a company’s income statement, this new standard is slowing getting the respect it deserves. The impacts will reach beyond the accounting department. Ultimately, investors will see changes in quarterly revenue and employees will see changes in pay that is tied to company performance.
What Does It All Mean?
Except for governmental agencies, every company in the U.S. that prepares accounting records and financial statements will be impacted by this new standard. That includes public and private companies and not-for-profit entities. The standard will not change the total amount of revenue a company recognizes on its customer contracts, but it could have a significant impact on when a company recognizes those revenues. This is particularly true of companies in certain industries like construction, contract manufacturing, energy, health care, and aerospace, just name a few.
The decrease in guidance page-count isn’t necessarily all good news. The move to a principles-based accounting standard means that companies will need to make numerous judgments on how to apply the new rules. And with judgments come documentation to support the new judgments. And conversations with outside auditors who may judge differently. In many cases, the accountants will be overwhelmed.
But number crunchers won’t be the only ones impacted.
- Information systems will likely need extensive software updates to keep up with the new requirements.
- Investors will see new revenue trends and will want to understand why. So will bankers.
- Boards of directors and senior management will face issues around corporate bonus programs that may see big changes in the timing of when employees earn corporate performance-based rewards. Yes, executive pay may be impacted!
2018 Is A Long Time Off – Why Start Now?
For calendar-year public companies, the new guidance must be adopted by January 1, 2018. Private companies and not-for-profit entities get an extra year. This seems like long way off so why all the fuss?
Depending on the size of your company, the adoption process will involve hundreds, thousands or possibly tens of thousands of hours of effort. It will involve educating employees, detailed reviews of customer contracts, financial analysis, and IT reconfiguration. For companies with many distinct customers and contracts, the potential complications will mount. It will take time to formulate and execute the activities necessary to get it all done. Aventine Hill has begun assisting companies with assessments and one of the lessons learned is that waiting has a risk (see my blog post on lessons learned).
What Should You Do Now?
There are several things companies can begin with.
- Start with developing an adoption timeline with reasonable milestones. Work backwards from when you need to have the new standard adopted.
- Inventory customer contracts and get a good understanding of the types of customers you have and the revenue streams they represent.
- Assess your IT systems and talk with your IT vendors about what they are doing to help their customers with required system changes.
- Lastly, take an honest look at your internal and external resources and determine whether or not your team has the bandwidth to get it all done. It’s likely it doesn’t.
What Is Aventine Hill Doing to Help Our Clients?
Our Technical Accounting team is currently assisting clients in the areas of impact assessment and adoption. Our work includes performing revenue stream analyses, contract reviews utilizing the new standard’s 5-step approach, researching implementation issues, preparing detailed financial evaluations, and advising clients on recommended courses of action.
We would be pleased to help you better understand your Revenue Recognition assessment and adoption challenges. If you would like to learn more on what this means to your organization, please use our Contact Form or call your nearest Aventine Hill office.