The five step approach to revenue recognition introduced with Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASC 606) has gone into effect and will be significantly changing some financial statements and the recognition of revenue across many industries. This broad standard requires management to make many judgments and estimates that weren’t required in the past. It also removed virtually all historical revenue recognition guidelines, including industry specific requirements.
ASC 606 will not only change the way we calculate revenue, but also change the terminology used on the balance sheet. Contract liabilities and contact assets will replace many terms, including deferred revenue, costs in excess of billings and billings in excess of costs. Revenue, however, is not the only account that may be affected by this standard. Commissions and advertising costs may also be affected either through timing of expense or through classification on the income statement, with some items now lowering overall revenue instead of increasing expenses.
Here are three things company’s should be doing to now to prepare for year-end:
- Identify all revenue streams. Create a list of how and why money is coming into the company.
- Identify all types of contracts within those revenue streams. Many companies have a standard contract that are used across all customers, others allow for differences in payment terms, discounts, price and concessions. Company’s need to accumulate all deviations of contracts to fully understand the effect ASC 606 will have on their financial statements.
- Evaluate the contract through the five-step approach and determine if a change in recognition will occur.
Below are industry specific examples of how revenue recognition is treated under ASC 606:
- Manufacture – Point in Time
- Manufacture – Overtime
Smith Schafer is here to help with this transition and we are available to assist in contract review, answer questions or document your new procedures related to revenue recognition.