Rose Report: Issue 23
Changes to Recognizing Revenue
You’ve completed a job or a task order in a contract and issued an invoice to your client. At what point can you mark the revenue as recognized in your books? Depending on the industry, sometimes it’s at the completion of the task and sometimes it’s based on rules specific to that industry.
However, the method by which revenue is recognized is among several accounting rules being changed this summer, with an effective date of 2017.
These revisions have been issued by the Financial Accounting Standards Board and will affect almost every accounting department across the United States.
Many of these changes are guided by the US Generally Accepted Accounting Principles (GAAP) or by the International Financial Reporting Standards (IFRS). The new standards will move US GAAP closer to IFRS.
“GAAP is more of a rules-based approach, while IFRS is more principles-based,” explains Rose Financial Services CEO and founder Ted Rose. “Some of the differences between US GAAP and IFRS are going to change so that over time, they become very similar.”
The new standard removes the industry-specific guidance, which means fewer rules and a more simplified approach. However, according to the American Institute of CPAs (AICPA), more professional judgment and interpretation will be required with the new standards. The AICPA considers these changes the most substantial revisions to GAAP in decades.
Rose says that the new standards will take on the more principles-based approach and should be implemented following a five-step process:
- Identify the contract with the customer
- Within the contract, identify separate performance obligations
- Determine what the actual projected price and transaction price is for that contract
- Allocate that transaction price to separate performance obligations in the contract
- Recognize revenue when the entity satisfies performance obligations
While there’s some time for companies to prepare before 2017, they’ll need to start keeping track of revenue using the new standards in 2016 in order to report prior year comparatives. Rose suggests that companies build a cross-functional team for the implementation process. The team should consist of individuals from operations—who will determine how to deliver and perform to make sure the sales process does not have a negative impact on revenue recognition—and legal.