Companies that generate revenue and apply US GAAP or IFRS are currently facing major change. In May 2014, the FASB and IASB 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.
Start preparing now to figure out how the revenue recognition standard affects your financial picture, your investors, and the way you do business. 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.
When accounting for arrangements today where some portion of the revenue is contingent, companies may wait until contingent amounts are known.
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.