Part three of a 6-part series
The new revenue recognition guidelines redefine “revenue” for every US GAAP and IFRS company—but its impact is more severe for companies who offer discounted goods and services alongside fully-priced goods or services, and for those who deliver to customers over extended time periods, or both simultaneously.
There are exceptions; the guidelines do not apply to organizations covered by other standards (e.g. insurance or leasing contracts).
All companies need to review their revenue for hidden bundling and implicit performance obligations. These guidelines are likely to impact pharmaceutical companies, telecoms, construction contractors, real estate developers, auto companies, and other firms with multiple sources of revenue. Examples:
1. A software company ships a new game, but some missions or episodes are missing.
2.a. A cellular telephone sold under contract that includes automatic software upgrades for one year is considered a single performance obligation.
b. A phone with a list price of $600 is sold to a customer under a service contract for $200. The cell bandwidth revenue for that client must be recognized to include a “claw back” of the difference of the list and selling price of the device.
3. An auto dealer that includes maintenance services with the sale of a car can only recognize the service revenue once the owner of the car brings it in for maintenance.
4. Similarly, high-tech companies that include software licenses, consulting, and support services on sales contracts determined to be related will recognize service revenue once the services are delivered.
How will the new revenue recognition guidelines affect your organization? Look to part 4 of this series, “What are the challenges?” to answer this question.