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Preparing for Revenue Recognition Changes: Identifying Customer Contracts

by | Mar 16, 2017

Preparing for Revenue Recognition changes

Preparing for Revenue Recognition Changes

After full adherence to either GAAP or IFRS standards in revenue recognition, do you know if your business is ready for upcoming changes? One thing you likely noticed this last year is The Financial Accounting Standards Board imposed 20 different accounting updates or amendments. This was the most seen in a while, though some of these changes are still on the horizon.

Most of these relate directly to revenue recognition, something that keeps evolving to keep up with how companies evolve technologically. This is the basic intention behind the FASB (and the IASB) changes: to help companies keep up with generally accepted accounting principles.

The question is, have you been preparing for the revenue recognition changes? The ones still forthcoming won’t occur until later this year and through 2019. Even so, you need to ready yourself to avoid any future conflicts or fines.

Here’s a look ahead at the details.

The Basic Premise Behind the New Standard

For the FASB, the full purpose for the new standard is to record revenue when customers take control of your products. As the FASB reports, their changes affect only those who create contacts with customers for goods and services. It’s also for businesses that use contracts for transferring non-financial assets.

It’s all part of the Joint Transition Resource Group for Revenue Recognition, formed in 2014 when the FASB and IASB joined forces to enact these changes.

They’ve met periodically since 2014, with the last three meetings held this last year. During their last meeting, they set specific time tables for when their changes take place.

A Look at When the Standards Roll Out

One of the first new standards for public organizations goes into effect on December 15 of this year. So if you’re still in the process of changing things, you still have nine months at time of this writing.

For non-public organizations, you have far more time since it’s not until December 15, 2019. Even so, the FASB says both public and non-public companies can start using this standard earlier if they wish.

You may still fret about getting ready, though. It’s worth looking at the further details about what’s about to change.

Analyzing Your Customer Contracts

When the new rev rec standards take place, you’re going to have to scrutinize your customer contracts and the form you use. You’ll see what distinct items on your contract you have to provide services for, as well as which service the customer benefits from.

Also, you need to study what your promises are in your contract while determining the overall transaction price. The standard allocates the transaction price to the contract’s obligations. Then you’ll be able to recognize revenue when you satisfy the obligations in the contract.

Overall, it provides far more transparency between you and the customer. It’s going to offer a consistent principle for recognizing revenue, no matter the industry or geographic region.

Taking Away the Uncertainty of Revenue

Because contracts can sometimes create confusion about what’s exactly owed to a client, the standard provides even broader benefits. In the end, it’ll provide a better framework for addressing revenue problems as they occur. This is going to save you time as well dealing with discrepancies or arguments about the services you provide.

You’ll even see more compatibility across industries and capital markets, leading to less confusion about what the standard is for a specific industry category.

Improved disclosure is another positive aspect so your investors and financial team understand all the numbers involved in any contractual transaction.

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