This article, "Are You Ready for the New Revenue Recognition Standard?," originally appeared on Doeren.com.
New revenue recognition standards for privately held companies is just around the corner, with the new model for reporting revenue from contracts going into effect Jan. 1, 2019. ASC 606 – Revenue From Contracts with Customers (ASC 606) virtually eliminates all the existing industry-specific guidance and will require more management in judgement due to its five-step process.
With reporting changes of this magnitude, it is more important than ever to ensure your company is prepared to recognize these new standards. While industries such as construction, technology and service providers will see the most impact, almost all companies will be affected to some extent.
Five-Step Model
Under the new model, revenue from contracts with costumers is recognized based on applying this five-step model:
1. Identify the contract with a customer. The criteria for contracts moving forward should include approval and commitment by both parties, clearly identified rights of the parties, clear terms of payment, valuable exchange and guaranteed payment.
2. Identify the performance obligations in the contract. With a contract in place, all goods and/or services delivered to the customer needs to be identified. It will need to be specified whether the goods and services in the contract are distinct as individual pieces, or need to be combined with other goods/services until the bundle is recognized as distinct.
3. Determine the transaction price. Once the performance obligations are outlined, the price for carrying out the agreed upon goods and services will need to be distinguished. Companies can determine this price by considering the effects of items such as discount variables, time value of money, economic trends and non-cash financing.
4. Allocate the transaction price to the performance obligations in the contract. Whether the goods and services distinguished in the contract are individual or bundled, a transaction price should be allocated to each separate piece based on what they would sell for separately.
5. Recognize revenue when (or as) the entity satisfies a performance obligation. As soon as the promised goods or services are delivered, the revenue should be recognized. If goods or services are delivered over a period of time, then revenue should be recognized over time.
Doeren Mayhew’s trusted advisors can help implement these new revenue recognition standards by working closely with your company to develop a plan, analyze current controls and processes, assess the overall business effect, identify required disclosures and more. Contact us today for assistance.