If your company manages their financial statements using the Generally Accepted Accounting Principles (GAAP) or International Finance Reporting Standards (IFRS), you will likely be affected by the upcoming revenue recognition standards. These standards dictate how funds received for customer contracts that involve the transfer of goods or providing of services must be recorded, and most businesses will have to change their processes.
The changes have been put in place by the Financial Accounting Standards Board (FASB) in conjunction with the International Accounting Standards Board (IASB) and are designed to be industry neutral while improving the overall level of transparency. Here’s what you need to know about how these policy shifts could affect your company.
Will You Be Affected?
As mentioned above, essentially any business who keeps their financial statements based on GAAP or IFRS will be impacted by the changes. While it is important for everyone covered by these shifts to be compliant, companies that provide financial statements to outside entities should be especially careful when implementing the changes.
Any business that works with customers to provide goods or services is also affected, including, but not limited to, the technology, construction, and automotive sectors.
New Revenue Recognition Standards
All entities that participate in customer contracts for the transfer of goods and services will need to recognize revenue based on what the business anticipates being entitled to as a result of these contracts. The revenue must be recognized as soon as the customer obtains ownership of the product or access to the service, regardless of price protection or the ability to return the item (or exit the deal) is provided.
This rule change is significant in numerous industries. For example, software providers were previously able to recognize revenue later in the process, after the risks and rewards of the transfer of ownership were assessed.
When Do the New Rules Go Into Effect?
Both private companies and not-for-profit organizations will need to follow the new guidelines for the annual reporting periods beginning after December 15, 2018, and continuously going forward. Early application of the new revenue recognition standards is permitted for these entities.
Public companies are required to begin on the next annual reporting period following December 15, 2017. The guidance also extends to interim reporting periods within the previously specified period.
What You Need to Do
The first step every company needs to take is to assess whether the new revenue recognition guidelines apply to them. And the sooner the determination is made, the better. Not only will the changes affect accounting procedures, which is no small impact, but it could also change how the business approaches the issuance of commissions as well as the construction of customer contracts.
By starting now, you give your company time to adapt to the upcoming change in advance. And, if you are ready early, you can begin using the new processes before the required date (unless you are a public entity).
If you require new skilled professionals to join your staff to make the transition manageable, the team at The Squires Group can connect you with top talent in their fields. Contact us today to see how our services can help you become prepared for these important changes more quickly.