Remember the late 90’s when Y2K had everyone scrambling to get their computer systems ready for the change of the century? Or how about the compliance issues Sarbanes Oxley created after the Enron and WorldCom fiascos? Now, we have a new issue that impacts both public and private organizations, and that is ASC 606, which focuses on revenue recognition. These new guidelines have companies scrambling to comply and many will be caught off-guard if they don’t get a clear vision on how they will deliver on their customer contracts and deliverables
On May 28, 2014, the FASB and the IASB issued new guidance on revenue recognition. The new reporting standards were created because there was disconnect between GAAP and IFRS reporting. This new guidance creates uniformity across all companies and all industries. So, if you have special reporting on your revenue recognition, you should seek out someone who can help your company comply with the new reporting standards.
According to the FASB Website:
*The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers. The new guidance:
– Removes inconsistencies and weaknesses in existing revenue requirements
– Provides a more robust framework for addressing revenue issues
– Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
– Provides more useful information to users of financial statements through improved disclosure requirements, and
– Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer.
The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers.
WHEN WILL THE FINAL ACCOUNTING STANDARDS UPDATE BE EFFECTIVE?
On August 12, 2015, the FASB issued an Accounting Standards Update (ASU) deferring the effective date of the new revenue recognition standard by one year.
Based on the Board’s decision, public organizations should apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Nonpublic organizations should apply the new revenue standard to annual reporting periods beginning after December 15, 2018.
Public organizations should apply the new revenue standard to interim reporting periods within annual reporting periods beginning after December 15, 2017 (that is, a public organization is required to apply the new revenue standard beginning in the first interim period within the year of adoption). Nonpublic organizations should apply the new revenue standard to interim reporting periods within annual reporting periods beginning after December 15, 2019 (that is, a nonpublic organization is not required to apply the new revenue standard in interim periods within the year of adoption).
Additionally, the Board decided to permit both public and nonpublic organizations to adopt the new revenue standard early, but not before the original public organization effective date (that is, annual periods beginning after December 15, 2016). A public organization should apply the new revenue standard to all interim reporting periods within the year of adoption. A nonpublic organization is not required to apply the new revenue standard in interim periods within the year of adoption.**
End of FASB Website Material
Heavily Impacted Industries
All industries will be impacted by the new guidelines, especially when a contract/transaction has multiple deliverables, e.g., product and warranty. The industries that need to pay special attention to ASC 606 include:
– Real Estate
– Asset Management
Examples of ASC 606 Compliance Complexities:
– Multi-item contracts with multiple deliverables
– Hardware with warranties
– SaaS/Cloud-based offerings
– Construction projects that last several months/years
– Long-term contracts with add-on services like training, professional services, etc.
– Warranty agreements included in the purchase of a product
– Extended warranties
– Service contracts attached to hardware or software
As indicated earlier, public companies will need to have all of their annual and interim reporting in compliance with the new standards no later than December 15, 2017. Nonpublic organizations will need to be in full compliance by December 15, 2018. Both public and nonpublic organizations can begin reporting on the new standard now if they would prefer to get a jump on the deadline.
If you would like to learn more about the new revenue recognition reporting guidelines, please contact NOW CFO today and set up a free consultation appointment. We can help you establish a game plan and timeline to make sure you are ready to comply with the new guidelines.
NOW CFO is offering a free ASC 606 assessment to see if and how your business will be affected by the new revenue recognition standard. Contact us today!
Link to FASB website: http://www.fasb.org/jsp/FASB/Page/BridgePage%26cid=1351027207987#section_1