Resources [ Hot Topic]

The New Revenue Recognition Guidance: Key Points for Manufacturers

The New Revenue Recognition Guidance: Key Points for Manufacturers

Over three years have passed since the Financial Accounting Standards Board (FASB) issued its landmark revenue recognition guidance. Despite that time lag, many manufacturers and distributors have not yet started to seriously consider implementation steps. Entities should begin assessing how they will be impacted by the new standard in order to develop an appropriate implementation approach to ensure a smooth transition. This includes evaluating existing revenue contracts and accounting policies in order to identify potential changes that will result from adoption of the new standard.

 

What are the key points of which all manufacturers and distributors should be aware?

  • • Implementation dates of the new guidance:
    • • Non-public entities: years beginning after December 15, 2018 (calendar year 2019)
    • • Public entities: years beginning after December 15, 2017 (calendar year 2018)
  • • Entities will need to go through the five-step process: identify each good or service promised to a customer, determine whether each good or service is a performance obligation, determine the transaction price, allocate the transaction price to each performance obligation and recognize revenue when each performance obligation is satisfied.
  • • An agreement does not qualify as a contract (and therefore may not be considered for revenue recognition) unless collection of amounts due from the customer is probable. This is different from current GAAP, which requires that collection must be “reasonably assured.” Collection focuses on a customer’s ability and intent to pay, and if there are changes in circumstances during the life of the contract, the contract will have to be reassessed. Such a reassessment could impact recognition of revenue on future goods and services to be transferred.
  • • The new standard introduces the concept of a “performance obligation,” which is a promise to transfer a good or service that is distinct, or a series of distinct goods and services, to the customer. Going forward, the performance obligation – not the contract – is the unit of measurement for revenue recognition.
  • • The new standard also introduces the concept of “variable consideration,” which includes claims, penalty or incentive provisions, change orders for which pricing hasn’t been determined, etc. Variable consideration may be included in the transaction price (ie: “contract value,” in today’s terms) if it is probable that a significant reversal will not occur upon resolution of the uncertainty. An entity must elect whether to use the expected value or most likely amount methods in determining the amount of variable consideration to consider in calculating revenue. A general rule of thumb is that “probable” means that the outcome has a 70-80% chance of occurring. Variable consideration will need to be assessed at each reporting period.
  • • There are two transition options for implementation:
    • • Full retrospective method, by which an entity adjusts its prior-year financial statement balances in the year of implementation.
    • • Modified retrospective method, by which the cumulative effect of retrospective application is recorded at initial adoption.
  • • There is now extensive disclosure requirements related to revenue recognition policies and results. These disclosures will provide financial statement users with quantitative and qualitative information regarding revenue recognition policies and how they are applied.

 

The above just highlights the various considerations in implementing the revenue recognition guidance. There are many more factors, and each will need to be assessed for your company’s specific contracts. Please give us a call to discuss how the revenue recognition guidance affects your company.




Blue & Co.,LLC - Read more in our Hot Topic Archive! Click Here. Like what you read? Subscribe to our  newsletter. Click Here.