Revenue Recognition - Training & Education and Understanding Key Revenue Streams, Policies & Treatment
New Revenue Recognition StandardPart 2 of 4
In part 1, we provided an overview of the new revenue recognition standard, which is set to go into effect in December 2017 for public companies and one year later for nonpublic organizations. To facilitate the transition, we outlined eight steps to perform at key intervals beginning in Q3 2016. In part 1, we also discussed steps 1 and 2 of the transition timeline and their associated activities, which focused on the identification of project sponsors and development of an implementation task force.
Here, we discuss steps 3 and 4 of the transition timeline, which we recommend performing in Q4 2016. Steps 3 and 4 focus on training and educating organizational personnel on the new standard and understanding key revenue streams, accounting policies and treatments that are likely to be impacted.
Step 3: Train and Educate Organization Personnel
As more and more companies begin to assess the overall impact of the new revenue recognition standard on their organization, more questions are being asked of the FASB and IASB. A fair amount of guidance has already been published on the topic and additional information is expected through the remainder of this year and into 2017. Implementation teams need to stay abreast of the latest information in order to lead their organizations through the transition process. The following sources are likely to offer helpful guidance, which, in turn, can be leveraged to educate key employees:
• External auditors
• AICPA and state CPA societies
• FASB and IASB
• Other professional services organizations / consultants
• Technology providers with revenue recognition software solutions
• Industry-specific journals and publications
The implementation task force and / or the project sponsors need to be responsible for informing, educating, and providing training to key organizational personnel about the new standard, including:
• Board and Audit Committee members
• CEO and other C-Suite members
• Accounting and Finance Team
• Sales and Operations Team
• Information Technology Team
• Human Resources
It is important that each functional area understand the impact the new standard will have on business operations and their respective roles in recognizing revenue going forward. The new standard focuses on five activities that provide context for what actions every organization must apply:
Step 4: Understand the Key Revenue Streams, Accounting Policies and Treatment
Step 4 focuses on creating an inventory of all contracts between the company and its customers. This inventory needs to be very detailed, and should include specific payment terms and conditions, all of which may have an impact on how revenue will be recognized on a going-forward basis. This is a key reason to involve sales and operations personnel in the process as they have extensive knowledge and experience with the specific nuances of each and every contract. A critical mistake would be for the accounting department to assume that the company operates on one standard contract with each and every one of its customers, only to discover that those who negotiate with customers actually modify each and every contract, based on the specific requirements of that specific relationship. This work should be done early enough to allow for some initial tests of how the new guidance affects the recognition of revenue from these contracts.
Bear in mind that treatment can go beyond financial reporting and may affect:
• Compensation arrangements
• Certain industries with specialized guidance under current GAAP
• Measures used in debt covenants
It is also important to remember that if a company’s tax method has been following financial accounting and the company changes its books method, it cannot simply change its tax method to follow the new book method.
There are several areas where accounting and reporting changes will be potentially significant.
• Multiple element arrangements: Separate performance obligations must be identified and the contract price allocated to those obligations
• Estimated selling price: Management should consider all information that is reasonably available in determining stand-alone selling price for goods and services that are not sold separately.
• Variable considerations: Some contracts stipulate that all or a portion of the consideration be contingent upon achieving certain thresholds or events (e.g., rebates, incentives, performance bonuses, right of return). Variable consideration is reasonably estimable if both of the following criteria are met:
◦The entity has experience with similar types of performance obligations
◦The entity’s experience is predictive of the amount of consideration to which the entity will be entitled
• Time value of money: Long-term contracts require consideration of the time value of money in determining the transaction price when / if the contract includes a significant financing component
• Timing of revenue recognition: The new standard provides that each performance obligation needs to be evaluated to determine whether it is satisfied over time or as of a point in time
• Construction-type contracts: New accounting may require separating elements within the contracts and recognizing them with different margins and at different times than in the past
• New criteria for accounting for software arrangements: VSOE is no longer required for a software arrangement
• Disclosures: Disclosures will become even more important going forward
While every step in the timeline is important, the overall success of the transition will be heavily dependent upon the team’s understanding of its key revenue streams and the corresponding customer contracts associated with them. If the understanding of the various contract terms is not complete and there is a risk that all types of contracts are not analyzed, then the risk of recognizing revenue incorrectly is greatly increased.
In the third installment in our Countdown to Revenue Recognition informational series, we will discuss the transition-related activities that should be performed in late Q4 2016 and early 2017, which focus on selecting a sample of contracts and applying a standard as well as conducting an impact assessment.
Return to Revenue Recognition Series page.