The new revenue recognition guidance is here…will it change how you do business?
Revenue is a critical performance metric — and revenue accounting rules affect how you do business. They can influence key business decisions, including how companies draft contracts and negotiate with customers. Now that the new revenue guidance is final, a first step is assessing its impact on existing contracts and transactions. It also means taking a close look at your business practices and go-to-market strategies, and considering whether to make changes in light of the new rules.
The new guidance eliminates much of the prescriptive — and often industry-specific — guidance that exists today. Companies currently following industry-specific guidance, such as software companies, will see the biggest change. These companies may also find that the new rules result in reported revenue that better reflects the economic substance of their transactions.
The timing of revenue recognition will be similar to current practice for some transactions, but you won’t know for sure until you apply the new guidance to your company’s specific circumstances. One key difference is that revenue from contingent fees (including performance bonuses or royalties) might be recorded earlier as compared to today’s model. Other differences include new approaches for reporting fees from licensing intellectual property and capitalizing contract-related costs. Additionally, the time value of money could affect the amount of revenue recorded for longer-term contracts.
Getting ready for the new guidance should be a cross-functional effort. Changes to the top line can have a broader impact on other areas of the business, including income taxes and arrangements such as bonus plans, commissions, and debt covenants. Some agreements may need to be adjusted or renegotiated to maintain their original intent.
The first time public companies will apply the new guidance is 2017. However, if you haven’t already, now is the time to assess its impact, and prepare investors for potential changes to your company’s financial picture. The earlier you identify the implications of the new guidance, the better positioned you will be to optimize its implementation.
To have a deeper discussion of how the new revenue guidance might affect your company, please contact: