What is all the buzz about the ‘New Revenue Standard’? How does it impact you?
The FASB and IASB issued their converged standard on revenue recognition in May 2014, which is referred to as The New Standard / ASC 606 / ASU 2014-09. The new standard will significantly affect the current revenue recognition practices of many companies. Depending on an entity’s existing business model and revenue recognition practices, the new standard could have a significant impact on the amount and timing of revenue recognition. All entities will likely have to consider changes to information technology systems and processes.
Below is an overview of the ‘5 Step Process’ prescribed in the New Standard and how Revenue Edge is geared to support both the New Standard and Dual Reporting.
5 Step Process:
Step 1: Identify the Contract
Step 2: Identify Performance Obligations
Step 3: Determine Transaction Price
Step 4: Allocate Transaction Price
Step 5: Satisfy Performance Obligations
How Revenue Edge supports the 5 Step process of the New Standard and Dual Reporting
1: Revenue Edge allows for grouping of transactions separately as needed under Current GAAP and New Standard in the same instance, thus enabling calculations under both methods on the arrangements as defined for each method.
2: Revenue Edge allows for combining or splitting of performance obligations under each arrangement differently as needed under current GAAP and New Standard in the same instance, thus enabling calculations under both methods.
3: Determination of the Transaction Price will be implemented based on the practical expedients to be set by the boards.
4: Revenue Edge has the unique capability for automating revenue allocation among the elements of a multiple element arrangements both under ASC 606 and Current GAAP in parallel.
Relative Selling Price Allocation under ASC 606
Allocation under various allocation methods under Current GAAP: Relative Allocation (EITF 08-1), Residual Allocation (SOP 97-2), Dual Allocation (EITF 09-3)
5: Revenue Edge’s robust algorithms factor in allocations, deliveries/ performance obligations, contingencies, billings and payments to calculate revenue and deferred revenue under Current GAAP and New Standard in parallel thus providing a powerful system for New Guidance compliance and Dual Reporting.
Why the time to act is NOW?
From a timeline perspective, companies must evaluate how the New Standard impacts their revenue accounting for their business processes. Companies can adopt one of two methods – Full Retrospective or Modified Retrospective. Below is the adoption timeline to put the requirements in perspective. Both approaches have their advantages and disadvantages and all pros and cons must be evaluated before a decision is made.
Public Companies
Effective date is January 1, 2018 for public calendar year-end companies
Full Retrospective Approach:
Current GAAP : 2016, 2017
New Standard : 2016, 2017, 2018 and beyond
Modified Retrospective Approach:
Current GAAP : 2016, 2017, 2018 (disclosure of impact)
New Standard : 2018 and beyond
Private Companies
Effective date is January 1, 2019 for private calendar year-end companies
Full Retrospective Approach:
Current GAAP : 2017, 2018
New Standard : 2017, 2018, 2019 and beyond
Modified Retrospective Approach:
Current GAAP : 2017, 2018, 2019 (disclosure of impact)
New Standard : 2019 and beyond
