It’s crunch time for private companies on revenue recognition
It’s understandable that FASB’s new revenue recognition standard might not be top-of-mind for private company finance personnel despite the impending effective date.
The standard takes effect for private companies for annual reporting periods beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019. So effectively, private companies must adopt by the 2019 year end.
That doesn’t give them much time to work on implementation, but it’s still easy for them to overlook the importance of this new standard.
“If you have a company, there are other priorities,” said Mike Westervelt, CPA, a principal with CliftonLarsonAllen in Charlotte, N.C. “Cash flows, running the business, a whole host of other things take priority over an accounting standard.”
In this case, it may be tempting to give minimal attention to the implementation because the timing and amount of revenue that companies report under the new standard may not be much different from the previous numbers.
But it may take a lot of work to generate those numbers under the new standard. In what can be a painstaking undertaking, companies have to take their data through the five-step process described in the standard and report accordingly.
“If private companies think this is going to be a one-week exercise, I think it’s going to take more time than they’re anticipating,” said Bryan Bodnar, CPA, a partner at BKD LLP in Springfield, Mo.
Private company leaders are running out of time to comply with this significant new standard. The most important thing, of course, is to get started.
After that, here’s what private companies can do to make sure they’re able to make an effective transition to the new standard.
There are a few areas of judgment in the standard that accountants need to consider carefully. One is the requirement to disclose revenue at a disaggregated level.
“What’s that going to look like for your organization?” Bodnar asked. “That ties back into getting out in front of this early. You need upfront to decide what those disclosures are going to look like and then decide whether you have the information to make them.”
Leaders of the implementation also will have to dig into their contracts to make judgments on whether they have different performance obligations that need to be treated separately or services that need to be broken out separately in their reporting, Westervelt said.
All this implementation work will be a significant task for some private companies. And with 2019 just a couple months away, ignoring this task now may lead to a lot of angst for companies next year.
“It’s a completely new standard,” Bodnar said. “… It’s a complete rewrite, so companies are going to have to go through all their revenue streams, go through the five-step model and everything in [the standard] and make judgments, evaluate considerations, draw conclusions, and document all that and have all that to support their conclusions and to provide audit evidence for auditors.”
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.
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