Revenue Recognition Solutions
Recognizing revenue is hard work—the new rules add a whole new layer of complexity when resources and skills are tight. We can get you through it.
Taking on ASC 606, the Revenue Recognition Standard
ASC 606, the revenue recognition standard, has been a huge undertaking as it shook up how finance teams thought about revenue, by introducing new definitions, concepts and examples. Fortunately, for companies that have yet to implement ASC 606, Revenue from Contracts with Customers, they can learn from the many lessons learned from the implementation experiences of others and ensure that revenue is properly recognized under the new accounting standard. Finance and accounting consultants who are experts in revenue recognition accounting can take them through what can be an incredibly complex process and make it as seamless as possible.
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Adoption of ASC 606 shifts in focus to a core principle—recognition of revenue for goods and services occurs when control transfers to the customer. This fundamental shift from previous revenue recognition guidance is where companies noticed differences when they made changes in how they recognize revenue. Taking away traditional bright lines and calling for more judgment than was permitted under the previous standards for revenue accounting, ASC 606 has led to multiple questions finance teams need to address as they move from one step of the revenue recognition standard to the next.
Making the change from previously followed guidance or adopting the revenue recognition standard for the first time as the company moves to generally accepted accounting principles, or GAAP, has also led some companies to change how their contracts are structured. Experts in revenue accounting can help your company make the right decisions and consider whether changes to existing processes would be beneficial.
How to Get Up-to-Date With the Revenue Recognition Standard
The Financial Accounting Standards Board took years to decide what the new standard would look like, how it would converge with IFRS, and erase decades of industry-specific guidance to create one, all-encompassing revenue recognition standard for the private sector. Then multiple delays were issued as it became clear the implementation process was complicated and companies would need time to adjust to the new standard. Now that it’s effective for all companies that follow GAAP, there continues to be a need to stay on top of the standard, in terms of best practices and expert interpretations.
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Since few corporate finance functions have the time or bandwidth to keep on top of all that, outside technical accounting expertise becomes a valuable resource to get companies through the implementation process and ensure ASC 606 continues to be followed and will meet auditor expectations.
At RoseRyan, we have a dedicated Technical Accounting Group that helps companies implement new standards and take on some of the thorniest accounting issues, including revenue recognition. Our advice is based on years of experience, extensive technical expertise and sharing of information as we work with a range of companies, all along the business lifecycle.
Understanding How to Apply the New Revenue Recognition Standard
Finance and accounting experts can walk you through understanding the new standard, lead the entire implementation effort, and train and mentor the team after adoption. Some of the key points in the standard include:
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Identifying performance obligations: The revenue recognition standard calls for determining whether the promises made to your customers are distinct within the context of the contract. If it’s capable of being distinct (when it can be used, consumed, sold, or held for economic benefit on its own), you will likely have a more straightforward determination, but figuring out things like the interdependence of promises on other goods and services can be a challenge.
This effort can begin by identifying all the promises being made to customers (e.g., warranties and indemnification provisions). Evaluate the nature of each promise (a milestone payment could be a promise or it could be an incentive payment, which would be a variable consideration). And consider whether the promises are distinct. What are the bare minimum performance obligations vs. optional elements in the contract?
Knowing when transfer of control happens: For physical products, this is an easy determination—an item can be recognized when a delivery driver drops a package on the customer’s porch, for example. But the pattern of transfer is not obvious for some performance obligations. If you’re constructing a building, for instance, the performance obligations may be satisfied over time—you are transferring control as the job progresses. You would not wait until the building is done to recognize revenue on that construction.
Evaluating contract costs: The standard changes how incremental costs involved in acquiring and fulfilling a contract are recognized. A salesperson’s commission could be considered an incremental cost. Recognition of the cost will need to align with recognition of the revenue.
Preparing for the Transition and Minimizing Audit Risk
The effort involved in making an accounting change like the revenue recognition standard can easily be underestimated. In addition to understanding ASC 606, there’s the constant concern over whether proper documentation is being kept that will meet auditors’ expectations. Companies need to keep notes on the thought processes behind their decisions.
For instance, judgment is needed to estimate the standalone selling price for each distinct performance obligation. Companies may rely on internal historical figures, see what’s happening in the marketplace, or come up with a new model, but they will need to provide backup for why one approach was selected over another. In addition, revenue recognition in accounting calls for proper disclosures related to significant judgments made in identifying performance obligations.
Rely on the expertise of RoseRyan finance and accounting experts who will take your team through the changes and make sure the company is prepared, with efficient processes and systems in place, to comply with the standard going forward. We’ll also support the company through the transition, which may involve process changes and training of the team.
FAQs
What is needed to audit revenue recognition?
Revenue recognition has been an area of interest for auditors and regulators long before ASC 606 was adopted by FASB. Finance and accounting consultants can keep you apprised of key areas of focus by auditors. We’ll do this while keeping auditor expectations in mind when it comes to this type of accounting, to ensure that the company has kept proper documentation or whether changes should be made. This can, in the long run, save significant time in terms of auditor inquiries and concerns.
How does the revenue recognition standard affect financial statements?
As the company works through the changes of implementing ASC 606, there may be timing shifts in revenue, and you will want to update users of your financial statements of any significant changes.
Why Choose RoseRyan?
Any major accounting change will put pressure on existing resources. To ensure that the accounting standard is implemented properly, and as efficiently as possible, companies can save significant time by turning to technical accounting experts who know the revenue recognition inside and out.
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At RoseRyan, our revenue recognition experts are full of lessons learned and best practices of companies that have previously surmounted these complex rules. From working with both public and private companies to transition to ASC 606, at multiple industries and stages of growth, we adapt our guidance to the company we are working with and tailor our solutions accordingly. One way of doing something may not work for another company.
We will take a holistic view as we help the team understand relevant systems and processes that may need to change, other functional areas in the company that may need educating, and tips and best practices for keeping key stakeholders informed throughout the process of ASC 606 adoption and after. They do all of this knowing your audit is right around the corner—and ensuring the company will ace it.
Get a Handle on Revenue Recognition and Lease Accounting Before It’s Too Late (webinar)
Struggling with the revenue recognition and lease accounting standards? You’re not alone. It can be a lot more work and more complex than you think. Public companies that went through the process had a resounding sentiment—adopting these mega rules requires more effort than first predicted. Benefit from their experience.
Revenue recognition playbook
A strategic playbook for taking on the new revenue recognition rules.
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