ASC 606 / IFRS 15 is nearly here!
The deadline to comply the new ASC 606 / IFRS 15 revenue recognition is just around the corner. However, we still see many companies without any proper preparation. For public companies, the new rules start in FY 2018 (or after December 15, 2017) and a year later for private firms, early adoption is permitted. Let us go through i) some background of the new guidance, ii) how this new regulation differs from what we currently have, and iii) how to prepare for this new guidance.
If you’re in accounting field, you would probably know that there are big and small differences between US GAAP and IFRS. These differences have caused difficulties in applying consistent accounting policies for multinational corporations or in comparing companies with similar operations but different accounting standards. The need for a consistent accounting policy has been raised by many parties of interests. In order to meet their needs, FASB and IASB worked together to converge the gap between US GAAP and IFRS. After 12 years of working together, FASB and IFRS jointly issued ASC 606/IFRS 15: Revenue From Contracts With Customers.
Under current guidance, revenue is recognized when rights and obligations are transferred to customer. For example, a company that sells tangible goods would recognize revenue when the goods are delivered. However, when a company builds constructions under a contract, the Company could recognize revenue over a period of time based on percentage of completion, or at once when the construction is complete. Current guidance leave revenue recognition to the management’s decision, but there have been claims that there aren’t enough references to support their decision.
According to the new guidance, an entity is required to determine timing and amount of revenue to be recognized by each contract. For each transaction, a company must i) identify the contract(s) with a customer, ii) identify the performance obligation(s) in the contract, iii) determine the transaction price, iv) allocate the transaction price to the performance obligation(s) in the contract, and v) recognize revenue when (or as) the entity satisfies a performance obligation. In order to apply the new guidance, an entity needs to analyze its contracts, and If needed, the company may need to come up with new operation strategies or amend their contracts with customers.
Revenue recognition is the most important and the most critical accounting policy. However, as mentioned earlier, not so many corporations are implementing or analyzing the impact of the new guidance. It might be because they believe that ASC 606/IFRS 15 is not a big deal. However, according to a survey done by Forbes, Verizon has been working on this for three years. Workday has hired a dedicated team of accountants to pore through 6,000 contracts. GM expects impact to be upwards of $1 billion. So, it is a big deal.
Some may believe that this change would only be reflected on financial statements. However, it would have impact on overall operation. For example, if employees commission is linked to the company’s sales or profit, this new guidance would change their current and/or future commissions. This would impact your income tax expense, so you may need to come up with different tax plans. Also, this might increase your liability ratio, which could adversely affect your relationship with bank.
This type of change requires external help from accountants or lawyers. So don’t wait until the last minute to seek for help. The application of this new guidance needs to be communicated with external auditor. Also note that the application is not a one-time deal. Rather, it is an on-going process to adopt the change which requires close monitoring.
If you are a public company or your parent company is a public, you are running out of time. However, don’t panic! You shouldn’t just ignore the change or make irrational decisions just because you don’t have enough time. Rather, you need to immediately seek for help to make a rational and logical decision and prepare for the change. For the companies that have one more year left, don’t procrastinate! Rather, take this opportunity to fine tune your operation and get ready for the change.