Companies need to adjust their accounting policies in order to incorporate the new revenue recognition principle from 1 January 2019.
2019 brings a significant change to US GAAP (Generally Accepted Accounting Principles). This requires private companies to implement the new revenue recognition (RR) guidance. It follows the 2018 RR implementation by public companies.
New revenue recognition standard
This is a large one for private companies as most of the RR guidance has changed, and a new revenue recognition model introduced. The 5 step model is more principle than rules-based, and accounting professionals responsible for the implementation of the new guidance will require good knowledge about the change and access to relevant company data for analysis.
Companies that have previously invested in technology and have been focussed on creating unitary databases with tools for easy search and analysis will have a head start.
The 5 step model requires accountants to do the following.
- Determine whether they have a contract
- Identify the performance obligations (eg. parties' responsibilities under the agreement)
- Determine the transaction price (how much money your customer will pay you)
- Allocate the transaction price (eg. split the price over the performance obligations under the agreement)
- Recognise revenue when the performance obligation(s) have been satisfied.
In applying the 5 step model, companies will need to be able to:
- Identify the main elements that classify a contract under the new RR guidance
- Identify whether the performance obligations under contract need to be split in pieces or bundled
- Calculate the price by taking into account the variable considerations, financing arrangements and any non-cash considerations
- Identify when transfer of control took place, as that is the moment when the revenue should be recognised.
Impact on internal frameworks
There are many elements that must be taken into account by companies. These items vary from process design and tightened internal controls to training for RR implementation requires more than purely technical knowledge about Accounting Standards Codification 606.
Re-designing the internal control framework should be high on any company agenda. With the new guidance, there will be more ways revenue could be advanced or delayed. Also, occurrence, which determines whether revenue transaction has actually occurred, may include double recording of revenue or artificial customers. At the same time, the new guidance allows for estimation and judgement. The higher the degree of estimation and judgment, the higher the risk of fraudulent financial reporting and error.
Actions for companies
Engaging with specialised resources to assess control frameworks is recommended. Companies should also implement appropriate segregation of duties between:
- contracting and the allocation of transaction prices (sales)
- contract management (identifying performance obligations, measuring transaction prices)
- operations (delivery of goods and rendering of services) and
- accounting (booking the transaction and recognising the revenue)
The delivery process should be updated to ensure proper documentation of the moment when delivery took place. Likewise the authorisation matrix to ensure that accounting entries and estimates are properly authorised. Disclosures required by the standard must also be properly maintained.
Talk to us
TMF Group's global accounting team assists clients with the application of the latest US GAAP changes in their management and corporate reports. We can also implement tighter internal controls, redefined as part of the RR process.
Need more information? Contact us today.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.