7 Changes New Revenue Standard May Bring

by Steven Sodini 27. January 2014 14:48

As we have recently entered into the first quarter of 2014, companies should start planning for a new converged revenue recognition standard that’s currently in the final stages of development by FASB and the International Accounting Standards Board, which will lead to changes in financial reporting for almost all entities that operate under U.S. GAAP or IFRS. The standard is set to be released this quarter. Companies should begin, if they have not already done so, to take inventory of major revenue streams to prepare for the implementation of the standard.

The seven major changes companies should expect to deal with include the following:

1. Updated criteria for contract determination

Companies may need to adjust their accounting policies and begin to review their current arrangements for meeting contract criteria to establish the new standards to be considered a contract.  Under the new contract guidance the following must exist:

  •  Commercial substance, or changes to cash flows
  •  Approval and commitment by both parties
  • Identification of rights and payment terms by both parties

2. New depictions of contract modifications

In addition to new criteria related to contract arrangements, companies will face a contract modification changes. This will be a large undertaking for companies who retrospectively adopt the new standard because they will need to consider past contract modifications in determining their contract balances.

3. Identifying different performance obligations

A new recognition method for contract components or components that companies will now need to identify separately is a change from contract accounting under the AICPA Statement of Position 81-1, where companies generally view the contract as the unit of account.

4. Judgment in selling price estimate

Furthermore, it will be import for companies’ management to be on top of, as well as thoroughly document the estimation of the selling prices. Companies should build an infrastructure to support the estimates that will recognize credits. Some credits companies should pay close attention to include, rebates and returns and price protections.

5. New depiction of transfer over time

The new standard will cause companies to shift to the “cost-to-cost” approach to show the transfer of goods and services to the customer, which will display the ratio of cost already incurred compared to the expected total cost of completing a project. This will be a change for many companies currently using the “units-of-delivery” method.

6. Change in performance incentives

With the change in revenue recognition companies may need to adapt different employee incentives. For example, changing policies to avoid employees engaging in channel stuffing will need to be address.

7. New Disclosures

Brought on by all the changes from the new standard, there will be significant adjustments to disclosure requirements as well. Disclosures will need to include, disaggregation of reported revenue, narrative explanations of changes in balances, information about performance obligations, judgments about the timing and allocation of performance obligations, and the determination of transaction price.  

 

Due to the vast changes companies will start to face, as the new revenue recognition standard is put into effect, “It’s going to be a significant implementation effort,” GE Technical Controller Russell Hodge, CPA said. Hodge followed up by saying contracts will need to be looked at in a whole new way. 

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