Robotics Industry News
Revenue Recognition Changes are Here
Clayton & McKervey Posted 11/26/2018
What once seemed to be so far off that it did not warrant our attention is now in our immediate future. The Financial Accounting Standards Board’s (FASB) new revenue recognition standard, ASC 606, takes effect for private companies for annual reporting periods beginning after December 15, 2018. This means that private companies must adopt by the 2019 year end and accounting systems should be in place to capture data beginning in January 2019.
Some of the areas to focus on, in implementation of the standard, include:
- Time is short so develop a timeline for adoption to keep the project moving.
- Evaluate all contracts.
- Determine if controls and accounting systems are in place and able to capture the right data for revenue recognition under the new standards.
- There are two methods available, full retrospective and modified retrospective with pros and cons to each.
Develop the financial statement disclosures. The standard is intended to provide stakeholders with more information than in the past. Systems have to be able to capture the data to make the relevant disclosures.
Don’t Underestimate the Work Ahead
The complexity of the new standard can make implementation time consuming, and the time remaining for that implementation is short. Clayton & McKervey has heard from many clients and other financial professionals that the standard will not impact them, so they are not giving it much attention. While it may be true that the timing and amount of revenue that companies report may not change significantly, the work to make that determination can be extensive. Companies have to look at their customer contract data against the five-step process in the standard and report according to the results of this analysis. This analysis is going to take more time than it seems.
While it is important for all affected companies to go through this analysis and document their process and conclusions to support their revenue recognition methodology, companies with a financial statement audit performed by an independent accountant will have to provide audit evidence of the steps that they took to determine proper revenue recognition. Many private companies rely on their CPA to assist them with some of the technical accounting issues that arise. The extent of analysis, process design, and judgments required to implement this new standard will require substantial involvement by management in order for independent accountants performing a compilation, review or audit of financial statement to maintain their independence. This means that a company may have to dedicate internal resources or hire an outside consultant to assist with revenue recognition implementation and help document their conclusions in order to provide the appropriate documentation to their CPA.
Another Viable Option: FRF for SMEs
Another consideration for private companies is to determine if US GAAP is still the best reporting framework for them. With the complexity of the revenue recognition standard, and then significant changes to the leasing standard in the following year, some are considering other financial reporting frameworks more relevant for their business.
During 2013, the AICPA introduced the Financial Reporting Framework for Small and Midsized Entities (FRF for SMEs). FRF for SMEs is a special purpose framework based on the principles of GAAP, but tailored to meet the needs of privately held businesses and their financial statement users. This framework follows traditional GAAP accounting for revenue transactions and leases.
When reviewing the effects of the new revenue and leasing standards, management may determine that financial statement users would be negatively impacted by the required updates, or that the cost of implementing the changes far exceeds the benefit. If either is the case, companies should take a closer look at the FRF for SMEs framework as a reporting alternative.
While FRF for SMEs is not GAAP, there are minimal differences between the two frameworks for everyday accounting issues. Although these are different reporting options, the level of assurance of an audit or review stays the same no matter which reporting option is used. For clarity, if a company obtained an audit for an FRF for SMEs financial statement, the relevant auditing procedures and opinion would provide the same assurance as a GAAP financial statement audit. In addition to maintaining traditional GAAP accounting related to revenue transactions and operating and capital leases, FRF for SMEs follows traditional GAAP for most transactions that affect privately held companies.
Clayton & McKervey has seen many clients successfully adopt the FRF for SME since 2013. The firm has been able to educate bankers and other stakeholders about the framework so that it is accepted for financial reporting requirements. It can be an excellent solution for those companies that do not need US GAAP financial statements.
If your company needs to continue to report on US GAAP and you are behind in implementing the revenue recognition standard we can consult with management to get you back on track.