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New revenue recognition rules will impact your business

Jul 15Jeff Matthews

In a joint pronouncement the US based Financial Accounting Standards Board and the International Accounting Standards Board adopted changes to revenue recognition rules.  The effect of the rules will vary by industry and frankly the accounting profession in general is working hard to understand the impact of these rules.  In some cases, the rules may accelerate the recognition of revenue while in others the amount of revenue recognized in a period may drop.

A couple of initial highlights:

All sales contracts will need to be evaluated to identify what is a contract.  Contracts may need to be parsed if the contract covers separate or distinct goods or services.  And contracts may need to be combined if the contracts are not for a separate or distinct delivery of goods or services.  Then the contracts will need to be broken into performance obligations.  An easy example is the sale of a copier with a maintenance contract included in the purchase price.  The contract price will need to be accounted for as two performance obligations and the revenue will be recognized as the contract is fulfilled.  The copier has a point of sale value transfer while the maintenance contract has a continuing performance obligation that must be recognized as the contract performance is fulfilled.

The rules apply to public companies for financial periods beginning after 12/15/2016 (calendar year 2017) and for non-public companies after 12/15/2017 (calendar year 2018).  But there are transition rules that will impact how soon data must be collected.   Reporting can be done on a retrospective basis or a modified retrospective basis.  These transition rules primarily impact firms with performance obligations that extend over fiscal periods.

The last teaser on this topic- percentage of completion accounting for construction and engineering contracts goes away.  The good news is that most of the methodologies of percentage of completion accounting are incorporated into the new rules.  However, the rules do not allow firms that stockpile uninstalled materials at a job site to recognize the profit margin on those materials until they are installed even though ownership has transferred.  The construction company will recognize the cost component in both the revenue and cost of the project but may not recognize the profit margin in advance of installation.

Stay tuned as this topic will touch you even if the impact is simply to change the revenue and income recognition of public companies in which you or your retirement plans are invested.

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