What a long, strange trip it’s been from the release of the new revenue recognition standard to the adoption year for private companies. The Financial Accounting Standards Board (FASB) released its initial changes to accounting for revenue from contracts five years ago under ASC Topic 606, Revenue from Contracts with Customers. In the intervening years, changes have been made, effective dates delayed, and public companies adopted the standard.
Although we are in the home stretch for adoption of the new revenue recognition standard, it could still be a mad dash to the finish line for those who have not started to prepare. Some private companies may not see it that way, however, which is a significant misconception.
It Doesn’t Apply to Me
Technology, life sciences, construction, professional services, software as a service (SaaS) and companies in many other industries will experience the impact of Topic 606 when assessing and adopting the new standard. In fact, any company that has contracts with customers is subject to Topic 606’s rules. So, too, will companies with a variety of revenue streams, variable consideration arrangements or that traditionally followed industry-specific accounting guidance.
Private companies that do not have some of these attributes may slip into the “it doesn’t apply to me” school of thought. They may be more likely to put off the revenue recognition assessment process until their 2019 financial statement audit cycle. This could be a costly mistake.
Companies should not equate “the new standard doesn’t affect me much” to “the new standard doesn’t apply to me.” Revenue recognition changes apply to everyone. They also come with ramifications beyond updates to accounting, so it’s a slippery slope to bypass a thorough evaluation of the new standard’s impact on your organization.
Why the Misconception Exists
Changes to the accounting for contracts under Topic 606 will have an effect on a company’s bottom line in situations where revenue is recognized earlier or later under Topic 606 than it was under the legacy revenue recognition guidance in Topic 605.
Companies may find that their revenue from contracts is recognized at the same time under Topic 606 as it was before, so there is little to no bottom-line effect of adopting the new standard. It’s important to note that revenue recognition will still have an impact on financial statements.
The new standard requires more judgments than past guidance. With those judgments come enhanced disclosure requirements. Internal processes will likely need a refresh. Companies that fall into the “minimal financial impact” camp may not see how much work is coming with the new disclosure requirements.
Why the Misconception Can Be Dangerous
Waiting too long to implement the standard could be disruptive to your 2019 financial statement audit. Your auditor may have questions or see issues with your adoption of Topic 606, and by the time the audit rolls around, it could be too late to address those concerns. Questions about the adoption could also delay the issuance of your audited financial statement, potentially leading to missed deadlines for the business processes that rely on audited financial statements, such as lending arrangements.
Your Solution: Complete the Assessment Now
Your company may have an idea of what the impact of the new revenue recognition standard will be, but it is highly recommended that you complete a formal, initial impact assessment anyway. The initial evaluation of how the new revenue recognition standard applies to your material revenue streams will benefit you in a number of ways.
First, it informs your adoption effort. The initial impact assessment will indicate right away if there will be additional hurdles to implementation. It will also help satisfy information requests from your financial statement auditor, who will want to know how you determined the impact (or lack thereof) that the new revenue recognition standard will have on your organization.
Without the initial impact assessment, your organization could be left trying to prove a negative when it comes time for your 2019 financial statement audit. You will be hard-pressed to prove to your financial statement auditor that the accounting standard doesn’t have an accounting or financial impact on your company if you don’t have evidence to support your claim.
Ask for Help
Accountants have been working through the new revenue recognition standard since it was released, and may be able to provide some guidance and support that make your implementation easier. If you have a question or need assistance with the initial impact analysis, consider asking for an outside opinion.
For more information about revenue recognition, contact us.
Dave is a Managing Director and Leader of CBIZ & MHM New England's Accounting Advisory Practice. He can be reached at 617-761-0508 or at firstname.lastname@example.org.