The new standards are meant to increase financial statement comparability across companies and reduce the complexity in revenue recognition. These guidelines will require companies to reallocate revenue with greater frequency—each time a customer contract changes—and defer expense recognition to align with the contract’s delivery.
How ASC 606 and IRFS 15 May Affect Your Business
All companies should assess their accounting practices and see how their revenue streams compare to the new rules. Organizations should also consider what, if any, impact this may have on their financial statements. It is a wise move as part of financial management.
If you are currently using spreadsheets to manage your accounting, it will be almost impossible to comply with this law and IRFS 15 compliance, the effects of which will begin in December 2016. Most public companies will need to comply in 2018 and private companies in 2019. The businesses most affected by these changes are companies that offer multi-element contracts and long-term service contracts. If you have tiered pricing, volume discounts, contract modifications, and other pricing considerations, you may be affected as well.
If it takes effect in 2018, why are we worried about it now? Because if you have a customer contract that extends beyond the start date, you need to take action now. Public companies with 2-year contracts are impacted immediately.
ASC 606 and IRFS 15 Require Changes in Accounting Systems
According to the FASB document, “The core principle is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”
There are five basic steps to comply with the new regulation:
- Identify the contract with the customer.
- Identify the performance obligation within the contract.
- Determine the transaction price.
- Allocate the transaction price.
- Recognize the revenue when the entity satisfies the transaction. (Typically, step 5 occurs when goods or services are delivered satisfactorily to the customer.)
The goal, of course, is to protect customers and to make it simpler and clearer for entities to recognize revenues. Many organizations are already using similar protocols and, for those organizations, making adjustments to satisfy the requirements should be simple. For others, it may take a deeper look at the way they are recognizing revenues, and shifting some of their processes.
Keeping Abreast of FASB Changes
Any changes that impact your business should be noted and researched as soon as possible so that you can comply with the requirements. Failing to do so can put your nonprofit at risk for losing its nonprofit status. You also risk falling behind in compliance issues, an important part of accurate nonprofit financial management.
If you are using Acumatica ERP, you can meet these new standards. The software’s revenue recognition module can manage complex multi-element sales scenarios required by ASC 606 and IFRS 15. In addition, you can customize Acumatica to meet your unique business requirements and workflow. Acumatica offers Deferred Revenue Accounting to help you control and account for revenue recognition in future periods.