Private Equity Sector Insight – New revenue recognition accounting standard

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New revenue recognition accounting standard: the new top line for portfolio companies

The Financial Accounting Standards Board and the International Accounting Standards Board issued a new revenue standard for Private Equity (“PE”) portfolio companies. Public companies are required to apply this to their 2018 financial statements.

In May 2014, the Financial Accounting Standards Board and the International Accounting Standards Board issued a new revenue standard with the goal of creating a single, comprehensive revenue recognition model across all industries and capital markets. Virtually all companies will be impacted; the new standard will supersede nearly all existing US Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standard guidance regarding revenue recognition. 

In response to requests for deferral, the FASB agreed to defer the standard by one year such that public companies are required to apply the new guidance to their 2018 financial statements (early adoption at the original effective date is permitted). 

The new revenue standard is arguably the most significant accounting change in many years, given the influence that an entity’s top-line revenue has on business decisions.The new standard could potentially change a number of key financial metrics and ratios, in particular earnings before interest, taxes, depreciation, and amortization (“EBITDA”). Also, for PE deal professionals, the new standard will require careful consideration of the impact on due diligence, investment and exit strategies.