Accounting for revenue recognition:
More critical than ever
The FASB and IASB recently released a final, converged, principles-based standard on revenue recognition. Companies across all industries will use a new five-step model to recognize revenue from customer contracts.
The new standard, which replaces nearly all existing US GAAP and IFRS guidance, will require significant management judgment - in addition to changing the way many US companies recognize revenue in their financial statements. The changes will have pervasive impacts on people, policies, processes and systems.
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Extensive changes call for intensive preparations
Although the new standard will affect certain industries more than others, all companies will feel some impact. These changes may fundamentally influence accounting for revenue recognition for US companies, including, but not limited to:
- Changes to the number of deliverables in an arrangement that revenue must be allocated to;
- The way in which revenue is allocated to those deliverables;
- The timing of recognition of revenue; and
- Other areas (i.e. contingent revenue and accounting for contract costs).
The boards have provided time for companies to adopt a measured approach to implementation, but the pervasive impact of the new standard on data, systems, processes and controls, means companies will need to get started on the transition effort well in advance of the effective date, especially if they choose to apply the standard retrospectively.
Companies should reevaluate their business processes and systems underlying the business cycle. This will help them determine what changes are necessary to enable the judgments and estimates required under the new standard as well as capture the appropriate data needed for the new accounting and disclosures.
The new rules won’t take effect in the US until after December 15, 2016, but many companies are starting to prepare now in order to allow time to assess the impacts, plan, and implement the necessary business process and system changes before the effective date.
For example, when accounting for arrangements today where some portion of the revenue is contingent, companies may wait until contingent amounts are known, and book the actual amount when the contingency is resolved.
Under the new approach, companies that have predictive experience with such arrangements may be required to make an estimate of the revenue the company is expected to be entitled to and allocate some of that contingent revenue to upfront deliverables if that amount is probable of not reversing. The increase in the use of such estimates means that companies will need to track those estimates over the life of a revenue arrangement, and periodically revisit those estimates to determine whether facts and circumstances indicate that an adjustment to revenue is appropriate as needed.
There are a number of benefits to the new standard. Particularly in industries with industry-specific guidance like the software industry, companies have gotten used to constraining certain business practices to avoid the resulting unfavorable impacts to the way revenue is recognized. The new guidance may provide companies in these situations with opportunities to structure their business and go to market in a way that makes sense for the business, while still getting an accounting answer that reflects the economics of the transaction. This doesn’t always happen under today’s rules. It’s important for businesses to balance this incremental flexibility with the associated back-office burden that may be required to ensure such arrangements are properly accounted for.
The PwC solution
PwC’s team of professionals can help you evaluate the changes under the new regulations, determine how significant they will be going forward, and lay out a path toward implementation.
PwC has developed a robust, but flexible and scalable methodology to successfully deliver GAAP change projects. We have developed a suite of flexible, project enabling tools and templates to support our clients to quickly mobilize and help facilitate an efficient and effective project.
Revenue Recognition additional information and insights