Revenue recognition is about to change. Are you ready?
Accounting standards are changing the way companies will be allowed to report revenue. The new revenue recognition guidelines, ASC 606 and IFRS 15 from the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), fundamentally change the way businesses can recognize revenue from the delivery of goods and/or services over time.
The businesses most affected by these changes are companies that offer multi-element contracts and long-term service contracts.
Although the standards will not go into effect until 2018 for public companies and 2019 for private firms, those businesses with current contracts extending beyond the date these rules become effective will be required to meet the new reporting and audit requirements. Moreover, companies that have tiered pricing, volume discounts, contract modifications, and other pricing considerations can be affected as well.
For instance, a company that contracts to sell a product along with training and ongoing support must now assign a value to each deliverable component and recognize revenue as each component is delivered to the client. Additional considerations, such as changes to the contract, also affect how the revenue is allocated. Moreover, companies are required to disclose how they will transition to the new standard and the impact this will have on their financial statements.
The standards outline five steps to compliance:
- Identify the contract(s) with the customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price.
- Recognize revenue when a performance obligation is satisfied.
According to FASB, the new standards are needed to eliminate inconsistencies in the current reporting requirements and will ensure financial statements more meaningful to investors.
So, are you ready?
Acumatica has you covered. Our revenue recognition module can manage complex multi-element sales scenarios required by ASC 606 and IFRS 15. In addition, companies can customize Acumatica’s logic to meet their unique business requirements and workflow.
Find out more about Acumatica’s revenue accounting here.