5 Steps To New Revenue Recognition Standard

New Revenue Recognition Standard

There is a new Revenue Recognition standard that will need to be implemented for annual reporting periods beginning on or after December 15, 2018. The standard affects all entities—public, private, and not-for-profit — that record transactions using GAAP.

Why is that important when implementation is 2 years away? Management will need to start planning now for possible implementation issues and what transition approach will be used.

5 Steps to Revenue Recognition under the new standard:

1. Identify contracts with the customer

2. Identify separate performance obligations within the contract

3. Determine the transaction price

4. Allocate the transaction price to the various performance obligations

5. Recognize revenue when the performance obligations are satisfied

Change May Effect How Revenue Is Recorded

Some practical examples of how the change may effect the way you record revenue:

You sell yogurt for $5.00 per carton. After a customer buys 5 cartons, they get the 6th carton for free. Under the new rules, you would record $4.17 as revenue for each carton sale ($5 X 5 /6). You defer the recognition of revenue until the 6th carton is “sold”. You may also have a tax benefit of deferring that revenue to a later period.
A construction contractor has a clause in his contract that if certain milestones and dates are met, then a $500,000 bonus will be paid at the end of the contract. If the contractor has a track record of typically satisfying the conditions for the bonus to be paid, then the $500,000 bonus revenue will be recorded before the contract end date.
A manufacturer that typically recognizes revenue on the shipping date of the product will need to evaluate when “control has been transferred”. Some indicators that control has been transferred include : right to payment, title transfer, physical possession of asset, customer accepted asset. Some circumstances dictate that revenue will be recognized once the customer receives the product, rather than the shipping date.

A wide range of industries will be affected by the new revenue recognition rules including those in construction, manufacturing, retail and health care.

The tax and accounting effect of the new revenue recognition standard will vary from business to business. Although the effective date of the new standard is not immediate, there are tax-related issues, and changes to accounting systems, that should be addressed sooner than later.

If you would like to discuss your situation or have additional questions, please contact our professionals at 859-331-1717.