They are both hefty in size and complexity: The arrival of ASC 606, “Revenue from Contracts with Customers,” ASC 842, “Leases,” was a long time coming, and their complexity was exacerbated by the fact that their initial implementation deadlines were practically back to back. Fortunately, for the privately held companies that have yet to implement the lease accounting standards and revenue recognition standards, or are in the process of implementing them, they can lean on early adopters’ experiences.
Both the lease accounting and the revenue recognition standards have been open to interpretation for awhile now. However, your finance team is likely to run into challenges as they consider how the guidance applies to your company’s unique situation and circumstances.
Changes to Revenue Recognition Accounting: ASC 606
First, the basics: What is the revenue recognition accounting standard? At over 700 pages, ASC 606 shook up how companies recognized revenue—previous guidance was different for different industries and involved lots of bright lines. With one standard to follow now for revenue recognition accounting and more principles-based guidance, companies are directed to focus on a core concept: Recognition of revenue for goods and services happens when control is passed on to the customer.
The standard calls on companies to follow a five-step process when recognizing revenue: (1) identify the contract; (2) identify the separate performance obligations; (3) determine the transaction price; (4) allocation the transaction price to separate performance obligations; and (5) recognize revenue when each separate performance obligation is delivered.
The changes to the revenue recognition accounting resulted in some companies re-evaluating their revenue recognition policy and making changes to the structure of their contracts and related processes.
Implementation Challenges of the Revenue Recognition Standards
For companies new to ASC 606 as they bring their company in line with GAAP, revenue accounting has always been one of most scrutinized areas and needs to be done with great care.
As your company works through it, you’ll need to gather a lot of data around the company around the timing and scope of goods and services that are promised to customers. Practical methodologies will need to be developed for making variable consideration estimates. And disclosures and processes around disclosures will need to be created. Many disclosures will center on a key difference between this standard and old revenue recognition standards—because there is more judgment allowed, you’ll need to be forthcoming about how you arrived at your judgement calls when looking at revenue. For instance, you’ll need to disclose any significant adjustments involved in identifying performance obligations.
Changes to Lease Accounting: ASC 842
What is the lease accounting standard? Private companies have until January 2022 to implement ASC 842, which calls on companies to bring their right-of-use assets and associated obligations onto the balance sheet, and out of the footnotes. Companies that have already gone through this process quickly saw their balance sheet get weighed down, as putting operating leases on their balance sheet make them appear more leveraged than under historical GAAP. The idea behind ASC 842 was to give a clearer view of companies’ leasing activities, and it has made companies evaluate their finance lease accounting, capital lease accounting and operating lease accounting as a result.
Implementation Challenges of the Lease Accounting Standards
Taking on the lease accounting standard can be incredibly challenging for companies that have not centralized their leasing processes. If different parts of your company have made agreements along the way, as your company grew, you could be in for some surprises for the type and number of deals your company has made that fall under this guidance.
Like the revenue recognition standard, once you start getting a handle on your company’s many leases, you may want to revisit how leasing contracts are structured and build processes around that. To ease the workload and to make sure the company is making the right decisions for the long term, lease accounting experts can be a great help here. They can lead the implementation effort while checking in with the various organizations at your company to make sure every leasing issue is covered. Every step of the way, they will make sure decisions will hold up to auditor scrutiny.
Benefit from Earlier Adopters of ASC 606 and ASC 842
Taking on these accounting standards can be overwhelming, but you have an advantage over the companies that have finished up their implementations. You can lean on the wisdom of finance and accounting pros who know these accounting standards inside and out, and are armed with best practices to make sure your implementations will be seamless and that your team knows what to do going forward.
Learn more about how our technical accounting experts help companies with their accounting standard implementations, and let us know about your most pressing accounting issue, so that we can get you through it.