By Ken Tysiac
It’s understandable that FASB’s new revenue recognition standard might not be top-of-mind for private company finance personnel despite the impending effective date.
The standard takes effect for private companies for annual reporting periods beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019. So effectively, private companies must adopt by the 2019 year end. That doesn’t give them much time to work on implementation, but it’s still easy for them to overlook the importance of this new standard. “If you have a company, there are other priorities,” said Mike Westervelt, CPA, a principal with CliftonLarsonAllen in Charlotte, N.C. “Cash flows, running the business, a whole host of other things take priority over an accounting standard.”
In this case, it may be tempting to give minimal attention to the implementation because the timing and amount of revenue that companies report under the new standard may not be much different from the previous numbers. But it may take a lot of work to generate those numbers under the new standard. In what can be a painstaking undertaking, companies have to take their data through the five-step process described in the standard and report accordingly.
“If private companies think this is going to be a one-week exercise, I think it’s going to take more time than they’re anticipating,” said Bryan Bodnar, CPA, a partner at BKD LLP in Springfield, Mo. Private company leaders are running out of time to comply with this significant new standard. The most important thing, of course, is to get started.
What private companies can do to effectively transition to the new standard:
- Identify your “point person.” Your organization needs somebody in charge of this implementation to make sure it gets done correctly. That’s likely to be someone from the finance department. It’s also important to make sure this person has the support of people from operations, sales, legal, and other departments to help the implementation go smoothly.
- Determine the resources you will need. Will your point person be able to handle this implementation alone? Will it be necessary to get other help, perhaps from consultants or temporary accounting services? You need to make sure you have the right people to do this job.
- Develop a timeline. A well-organized set of milestones, roles, responsibilities, and accountabilities will help you make orderly progress.
- Scrutinize your contracts. The information in your contracts is the key to complying with the five-step revenue recognition process described in the new standard. In some cases, this close examination of your contracts may show you improvements that can be made in operations. For instance, if you find that certain contracts are losers from a revenue perspective, you may choose to renegotiate them.
- Evaluate systems. “You have to go through the five-step process,” Westervelt said. “Do I have those controls in place, and am I able to implement this? And on top of that, you have to look at, ‘Does my accounting system give me the ability to do this?’” If your system can’t do the job, it may be time for an upgrade.
- Create strong controls over adoption. If your adoption processes are not airtight, you will be susceptible to problems later.
- Pick the right transition method. In many cases, the modified retrospective version will be easier for companies to implement. But the full retrospective transition will provide investors and others with more of the information they need to compare the past to the present.
- Pay close attention to disclosures. One of the principal goals of the revenue recognition standard was to provide investors with more disclosures and useful information than in the past. It’s important to make sure your systems capture the right data to enable those disclosures to be made correctly.
There are a few areas of judgment in the standard that accountants need to consider carefully. One is the requirement to disclose revenue at a dis-aggregated level. “What’s that going to look like for your organization?” Bodnar asked. “That ties back into getting out in front of this early. You need upfront to decide what those disclosures are going to look like and then decide whether you have the information to make them.” Leaders of the implementation also will have to dig into their contracts to make judgments on whether they have different performance obligations that need to be treated separately or services that need to be broken out separately in their reporting, Westervelt said.
All this implementation work will be a significant task for some private companies. And with 2019 just a couple months away, ignoring this task now may lead to a lot of angst for companies next year. “It’s a completely new standard,” Bodnar said. “… It’s a complete rewrite, so companies are going to have to go through all their revenue streams, go through the five-step model and everything in [the standard] and make judgments, evaluate considerations, draw conclusions, and document all that and have all that to support their conclusions and to provide audit evidence for auditors.”
Originally published on the Journal of Accountancy.