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New Revenue Recognition Standards: What you need to know

02/02/2017

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New Accounting Standards you should know about

With major changes on the horizon for businesses across the board, companies are scrambling to find solutions to the challenges that the ASC 606 and IFRS 15 revenue recognition guidelines provide. In May of 2014, the Financial Accounting Standards Board (FASB) issued the Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. This change is said to be the biggest accounting change in a decade and poses many challenges in navigating the regulation complexities.   

IASB & FASB - Streamlining Standards:

Ten years in the making, the purpose of this change is to converge with the International Accounting Standards Board (IASB). The goal is to remove numerous inconsistencies between the FASB and IASB revenue recognition standards. Beginning in 2018 for public companies and 2019 for private companies, these changes require entities, including not-for-profits, to clearly identify performance obligations in existing contracts, reapportion revenue at each contract revision or change and defer expense recognition to match with the contract’s delivery. With this being the case, contract add-ons and contract renewals must be aligned into a single contract and will prompt reallocations across both past and future periods – which can cause numerous revisions to revenue allocations and expense alignment.

Rule-based accounting to Principle-based focus:

With over 200 revenue recognition standards in the United States, the new principle-based standard focuses on the contract between the entity and consumer for the agreement of services or goods, and it also focuses on the rights and duties between the two parties. 

The most important change is there are now five steps in the revenue recognition process:

  • Identify contracts
  • Identify the separate performance obligations on the contract
  • Transaction price determination
  • Allocate transaction price to the performance obligations in the contract
  • Recognize revenue when the entity satisfies its performance obligations

EBITDA & Leases:

Earnings before interest, taxes, depreciation, and amortization (EBITDA) will be changing as well. This is because the “right to use” asset that is set for the lease is amortized over the lease term. This changes it from an operating expense to a reduction of lease obligation while amortization expenses are recorded to reduce the right to use said asset. 

Generally, leases will be on the balance sheet, and it is important to remember that leverage ratios will be changing and liabilities will be increasing. For some entities, this change will be extraordinary. For example, if a company has $500 million in liabilities and $500 million in equity and $200 million in future operating lease obligations, then they would have a leverage ratio of 1:1. In this example, when leases are recorded as a liability on the balance sheet, the leverage ratio would go to 1.4:1, which is a substantial change. 

What’s Next for Your Revenue Recognition?

Some recommended steps for businesses to evaluate the ramifications of the new revenue recognition standards are:

  • Inspecting revenue streams and contracts to target the specific revenue changes required and where these changes have the biggest impact
  • Addressing the areas that may take longer to resolve first for the adequate lead time

Automated Solutions:

At LBMC Technology Solutions, we understand that navigating through these changes can be a monumental task. This is why we provide solutions that are automated, enabling companies to both manage revenue using current and new guidelines simultaneously.  Our programs can offer you the ability to:

  • Automate processes for addressing all new ASC 606 and IFRS 15 rules for revenue reallocation and expense amortization
  • At the transaction level, disclose the impact of changes with surety with automated dual treatment
  • Clearly discern the impact of the new rules on entities results with revenue and expense forecasting
  • Automate complicated subscription billing with full integration to revenue recognition.

Contact LBMC Technology Solutions today for additional help and information. 

Posted in: Technology Services