The way in which revenue is recognized will be significantly changing at the end of 2016. This impacts all industries, but will have significant impactful to telecom, technology, and professional services companies.
Before we get into the details of how revenue recognition will be changing in the near future, if you are a private company, you might ask why is this important to me.
It’s important because the change in the way revenue is recognized is significant and won’t be isolated to changes in just finance. It will impact how you define goods and services, how you negotiate contracts, how you deliver goods and services, how you measure performance, and even how you compensate your employees. It’s not going to be a simple change and it will take substantial time for you to address the changes in you processes, policies,roles, and systems. Some older systems or customized systems might not even be able to support the changes.
Even though the change is significant ad will take time to address, you still might ask, why is this important to me. If you follow GAAP, you will be required to make the change by 1/2017. If you don’t follow GAAP, it’s still important for a few reasons. First, if you are considering selling your business in the future, you should be compliant with the new revenue recognition rules. Acquiring companies are going to expect you to follow good accounting practices and if you have not made the change, your books will be suspect and could negatively impact your valuation or could prevent the deal all together.
Second, the IRS (and tax collection entities in other countries) will be adopting the new revenue recognition rules. If you don’t follow the new rules which have an impact on the timing of recognizing revenue and thus an impact on net income for the year, your tax filing may be incorrect and you might have to pay penalties to the IRS and the accounting irregularities might even trigger an audit.
In the next article, we will explore what the new revenue recognition guidelines actually change about the way you do account and explain why this is so impactful to all aspects of your business.