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Advice and Information for Finance Professionals

5 Steps to Comply with New Revenue Recognition Guidelines

Funny thing about language… it’s always changing and evolving, even when it comes to centuries-old fields like accounting.

If you hear anybody talking about “deferred revenue”… well, that’s the old way of accounting—at least, it will be starting on January 1, 2018.

Starting next year, you’ll need to create “performance obligations.” This is the new approach mandated by the ASC 606 / IFRS 15 accounting standard.

The new guidelines will affect all public companies. By FY19, it will also impact private companies that are accountable to the public in some way—for example, government entities, credit unions, companies that issue bonds and securities, or any company planning to go public. It will have the biggest impact on companies that work with more complex contracts, that bundle goods and services together, or that typically have remaining deliverables even after the first major shipments are complete.

How to Comply with ASC 606 / IFRS 15

There are five steps to recognizing and accounting for revenue under the new guidelines:

  1. Identify contracts with customers: Gather information from disparate sales systems and determine if the information represents one or more sales contracts.  
  2. Identify separate performance obligations: Use the contract information to create “performance obligations.” Performance obligations are liabilities on the balance sheet and represent the goods and services that you must deliver to your customers—either “point in time” or “over time.”
  3. Determine the transaction price: Total up the value of all orders pertaining to a single contract.
  4. Allocate the transaction price: Allocate the transaction price (e.g. expected consideration) to the performance obligations in the contract, using the relationship of the total transaction price to the total standalone or estimated selling prices.
  5. Recognize revenue: You can only recognize revenue when the goods or services are successfully transferred to the customer and customer satisfaction is achieved.

This a huge shift in the way you currently account for revenue, and companies recognize the complexity of the work involved in complying with the new standard. Yet most are running behind. According to a PwC survey, the majority of public organizations have not even completed their impact assessments. Over half of North American companies expect moderate to high impact on their existing finance systems, yet most have not implemented the practices or software they need to capture the new procedures.

Where do I go for help?

The good news is, there is expertise and technology that can help. In a new webcast, my colleagues and I take a detailed look at the three biggest challenges that companies are facing:

  1. Accounting process changes
  2. Judgment and estimates
  3. Transition requirements

We outline our experience with companies that are already tackling these challenges, and we explore a new cloud service that can help you automate each of the five steps required for compliance.

Please join us to learn about the new revenue recognition standards, the impact on your business, and the solutions available.

Watch the webcast recording now.

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