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Sep
13
2017

Revenue Recognition Summary

In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards  Board (IASB) issued their converged standard, ASU 2014-09 “Revenue from Contracts with Customers.”  The standard provides a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies and industries and significantly reduce the complexity inherent in today’s revenue recognition guidance.  The standard is effective for non-public companies with annual reporting periods beginning after December 31, 2018 (2019 annual statements).  Early adoption is permitted as soon as 2017 year-ends.

The standard will apply to a company's contracts with customers, except for contracts that are within the scope of other standards (e.g., leases, insurance, financial instruments). Elements of contracts or arrangements that are in the scope of other standards will be separated and accounted for under those standards. The unit of account for revenue recognition under the new standard is a performance obligation (a good or service). A contract may contain one or more performance obligations. Although defined differently, the closest analogy under current guidance to a performance obligation would be a "deliverable" under the multiple element arrangement revenue guidance. Performance obligations will be accounted for separately if they are distinct, meaning the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and the good or service is distinct in the context of the contract. Otherwise performance obligations will be combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct. The transaction price is then allocated to all the separate performance obligations. The transaction price reflects the amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services. It will also reflect the impact of the time value of money if there is a significant financing component present in an arrangement. The transaction price excludes amounts collected on behalf of third parties, such as some sales taxes. Revenue will be recognized when an entity satisfies each performance obligation by transferring control of the promised goods or services to the customer. Goods or services can transfer at a point in time or over time depending on the nature of the arrangement.

This new revenue recognition standard will significantly affect the practices of many companies, particular those that currently follow industry-specific guidance.  We would expect industries which typically have significant customized customer contracts, such as aerospace, automotive, communications and engineering to be impacted the most, though most organizations will feel some impact of adopting this new standard. Depending on an organization’s existing business model and revenue recognition practices, the new standard could have a significant impact
on the amount and timing of revenue recognition, which in turn could impact key performance measures and debt covenant ratios, and ultimately could impact contract negotiations, business activities and budgets.  All entities will likely have to consider changes to information technology systems, processes, and controls. 

If you are interested in reviewing your existing processes and controls or would like to discuss how adoption of this standard may impact your organization, contact our Director of Audit and Accounting Services Jason Mayausky, CPA at (585) 410-6733 or via email at jmayausky@alliedfp.com.

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