The Financial Accounting Standards Board (“FASB”) has announced a proposal to delay by one year the effective date of implementation of the new revenue recognition standard under Generally Accepted Accounting Principles (“GAAP”), making the new date of change for public companies those reporting periods beginning after December 15, 2017. Private companies would have an additional year thereafter.
ASU 2014-09, Revenue from Contracts with Customers, has been widely heralded as an important step in the consistency of GAAP based reporting as well as the convergence of standards between FASB and the International Accounting Standards Board (“IASB”). The benefits will include increased comparability across entities, industries, jurisdictions and capital markets, as well as financial statements that are simpler to prepare and provide more useful information to users through improved disclosures. The new principles-based approach indicates
“an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity would apply all of the following steps:
Step 1: Identify the contract with a customer.
Step 2: Identify the separate performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the separate performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.”
Each of these steps contains specific practices which must be followed and additional disclosures, such as discussion of significant judgments and reconciliation of contract balances with customers.
However, the substantive nature of the change left many firms scrambling to fully clarify, assess and prepare for its impact. Given that some organizations were advocating for an even longer two year delay, firms should continue to proactively address implications in areas such as:
- Education on the changes with accounting personnel tasked with implementation and management who might face analyst/investor questions
- Design of new internal controls or alteration of existing internal controls to address the changes
- Updating or implementing new IT solutions to address the changes
- Review revenue-based contracts and performance-based compensation agreements and how their underlying economics might change
- Review financial covenants in lending agreements to ensure that compliance in not in jeopardy
- Examine how supporting estimates of selling price may require policy-making efforts and detailed underlying analysis
- Understand tax implications and engage in appropriate tax planning
- Understand how current year financials will be impacted when provided as prior year comparisons in conformity with the changes
- Understand how profitability estimates and targets may need to be revised
This change has been a long time coming, as evidenced by this 2009 article describing the beginnings of the process of changing to a principles based revenue recognition standard. However, the need for this additional delay demonstrates that companies still feel unprepared. For those that are more proactive, early adoption remains available as of the original effective date for public companies (reporting periods beginning after December 15, 2016), but requires doing so on an annual and interim basis. Private companies that adopt early can enact the change on an annual basis initially, and subsequently for annual and interim periods.