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The New World of Revenue Recognition: What is Really Means for Your Company

By Livia Gershon

On May 28, 2014, the FASB and IASB issued their very long-anticipated converged standard on revenue recognition.  Over the next four months there was much speculation and conjecture over what the new standard meant for private and public companies. However, t even after attending full day seminars solely devoted to explaining the new standard, most CFOs and finance departments had not even come close to figuring out to any degree of certainty what the new standard would really mean for their companies

In order to help clear the fog and offer corporate finance and accounting professionals practical advice in this endeavor, Proformative, in collaboration with strategic partner Intacct, developed a three part webinar series, The New World of Revenue Recognition. In these webinars, which were delivered over the past three months, revenue recognition experts offered actionable advice for companies to leverage in developing an action plan to adopt the new standard, the likely impacts of the new standard on revenue accounting for 5 keys industries, and the nitty-gritty decisions involved in the 5 steps of revenue recognition under the new standard.

The Federal Accounting and Standards Board (FASB) and the International Accounting Standards Board (IASB) spent more than a decade developing the new, unified system, which replaces existing GAAP rules in the U.S. and their equivalent in the European Union and elsewhere. But the shift is far more than a change in how accountants run the numbers through their spreadsheets. It will change how contracts with customers and suppliers get written, how services are bundled together, and how C-Suites explain themselves to investors.

"This is the biggest impact to financial statement preparation that I believe I will see in my lifetime," Jeff Tchir, director of revenue accounting for Silver Spring Networks and the expert featured in two of the webinars, told Proformative. "It’s bigger that equity accounting from last decade because it impacts our critical QTC processes, and it's bigger than SOX because it’s not just about controls.  Like all major changes, there will be companies that are ahead of the curve and will be ready; some will barely meet the deadline but will be OK; and there will be those companies that won’t be able to finalize their financial statements and file on time because they did not have the resources early enough. "

If you're worried about being part of that last group, don't panic. As Kelley Wall explains in the first webinar, Accounting is Only the Tip of the Iceberg, companies just need to create a clear roadmap with milestones toward adoption of the new standards, which must be in place by 2017 for public companies and 2018 for private ones. Kelley explains why this must be a company-wide project, not a matter for accounting to address on its own. She discusses the pros and cons of two potential methods of making the transition—either fully recapping the numbers for 2015 and 2016 or using a modified retrospective system.

Kelley also digs deeper into the meat of the new standards, noting questions that will come up during the adoption process. Among these are how to capitalize certain costs, how to look at contracts and purchase agreements, and what written or implied performance obligations mean when it comes time to crunch the numbers.

The answers to some of these questions will differ by industry, and that's the focus of the second webinar, Industry Impacts and Transition Options, led by Jeff Tchir. He notes that the new standards are technically principals-based, in contrast to the current rules-based understanding of GAAP. But, he says, the litigious American environment will undoubtedly lead to the creation of unambiguous rules to ensure that everyone's on the same page. Similarly, Tchir says that, while the new standards are uniform across all industries, their impact on any given company will depend on the nature of its business.

Tchir discusses issues particular to five industries: enterprise software, networking and telecommunications, contract manufacturing, cloud-based services, semiconductors, and construction. While some of the issues are more broadly applicable, this discussion gets into some of the specific changes that the new standards will require. For example, recognizing revenue from software will depend on how a company delivers value to its customers. Shrink-wrapped software that provides all its benefits immediately must be accounted for differently than virus software, in which the value derives from frequent updates over the term of the contract. In the telecom industry, the new standards will mean a new way of looking at a free phone provided with a mobile contract or a cable box delivered to a new customer. These expenses must now be considered as part of the service provided, even if they're not part of the company's core offering.

How can you determine how to account for various sorts of revenue? The new standards present a five-step test. That's the subject of the third and final webinar, A Deep Dive into the 5 Steps to Recognition, also by Tchir. The five steps are:

  • Identify the contract(s)
  • Identify the performance obligations
  • Determine the transaction price
  • Allocate the transaction price, and
  • Recognize revenue upon satisfaction of the obligation.

In this webinar, Tchir explains how to go through these steps to determine what changes need to be made in specific cases.

As the webinars make clear, there's nothing simple about adopting the new standards. For any given business, it will most likely be a serious project, requiring inputs from across the enterprise over, including from the C Suite. But, with the proper planning and focus, the switch will be manageable. The three part webinar series, The New World of Revenue Recognition, offer companies valuable information in determining what will and will not be important in adopting the new revenue recognition standard and how to develop the right plan to get there.