This RubinBrown Focus on Revenue Recognition is the tenth and final in a series of articles on the new accounting guidance for revenue recognition. In this series, we will explore different aspects of the new standard. Please contact a member of your RubinBrown team for more information and ways that we may be able to help you.
The core principle of the new standard is to recognize revenue from customers in a way that reflects the entity’s transfer of promised goods and services at an amount that represents the consideration that the entity expects to receive in exchange for those goods and services. The new revenue recognition model uses five steps to achieve this principle:
- Identify the contract with the customer.
- Identify the performance obligations within the contract.
- Determine the overall transaction price of the contract.
- Allocate the transaction price between the identified performance obligations.
- Recognize revenue as performance obligations are satisfied.
Legacy GAAP disclosures were often criticized as inadequate given the complexity and variability of transactions across entities and industries. In response, the new standard gives both a comprehensive set of disclosures along with an overall objective for the disclosures to assist entities in compiling disclosures that are useful to users without being overly burdensome to prepare. The standard also reduces the requirements for non-public entities as the costs to provide the information would generally outweigh the benefits to the users. The overall objective is “for an entity to disclose sufficient information to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.” To achieve this objective the standard includes the following key disclosures, among others:
- Total revenue for contracts with customers
- Losses from impairment of receivables or contract assets
- Disaggregated revenue, at a minimum, based on the pattern of the transfer of control (i.e., point in time vs. over time). Additional disaggregated data should be included to the extent it is necessary for a complete understanding of different revenue streams.
- Opening and closing balances of contract assets and liabilities along with current period revenue that was included in the opening balance of contract liabilities.
- With regard to performance obligations, entities should disclose key terms including nature of goods and services, when they are satisfied, payment terms and any obligations for returns, refunds or warranty.
- Significant judgements used in determining the timing of the satisfaction of performance obligations and the transaction price and its allocation between performance obligations.
- Practical expedients used and policy elections made.
This is only a summary of a number of required disclosures and is not meant to be a comprehensive list of all necessary disclosures. An entity will need to evaluate the standard and its specific circumstances in light of the stated disclosure objectives to ensure that their disclosures are adequate.
The new standard will impact all entities to varying degrees from simply some incremental disclosures to wholesale change to the entire revenue process. It is important for entities to continually evaluate their internal controls around revenue recognition. This includes controls around the implementation process as well. Appropriate controls should be designed and implemented to ensure that the standard is correctly applied to the entity and that the processes for ongoing accounting are updated as necessary. Management should ensure that the risks associated with the implementation process and change management are appropriately identified and that the process includes adequate monitoring and review by those with the requisite knowledge of both the standard and the underlying transactions. Additionally, the implementation should include adequate communication and training to those impacted by the changes in the standard. This may include external users of the financial statements, board of directors, legal counsel, sales and operations personnel along with the accounting and finance teams.
On an ongoing basis, controls should be identified at each of the five steps to ensure complete and accurate capture of all of the data necessary for proper accounting and disclosure. Entities also need controls in place to identify and evaluate modifications and contract costs. Even if the accounting changes are not significant, legacy controls should also be revisited to ensure that they are aligned with the new standard and any changes to the process. An entity should also expect to have additional controls related to the new disclosure requirements.
Implementation of the new standard will require significant effort and the work doesn’t end with concluding on the correct accounting. New processes and controls take time to develop and continuous monitoring is necessary to work through implementation challenges. Early Identification of data requirements and designing adequate controls at the outset are key to easing transition pain. Please contact your RubinBrown team members for further assistance.
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Revenue Recognition Resource Center