The old model led to similar companies arriving at different revenue recognition for similar services or goods, making it difficult to compare companies or compare certain goods and services.
In addition, US GAAP had over 200 pronouncements about how to recognize revenue, leading to inconsistencies, even within companies and industries.
In addition to being required for entities that report under US GAAP, the new revenue recognition standards provide many benefits to owners/management team and investors.
A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations—this can be written, verbal, or implied.
A promise to transfer distinct goods or services to a customer.
The transaction price is based on the amount of consideration to which an entity expects to be entitled in exchange for satisfying its performance obligations under the contract.
The transaction price of each performance obligation is determined by the relative stand-alone selling price of each product or service provided under the contract.
Performance obligations are satisfied by transferring the promised good or service to a customer. The good or service is considered transferred when the customer obtains control. This may be satisfied over time or at a point in time.
The impact of these financial reporting changes on the company’s tax reporting also needs to be evaluated. In most cases, companies will be required to file an Application for Change in Accounting Method (IRS Form 3115) to reflect the changes in recognizing revenue on their income tax filings, starting with the 2019 tax year.
Our team can provide guidance and support as you update your contracts and accounting processes to assist all clients with preparation and compliance.
If you have any questions, give our assurance team members a call, and we will help you navigate the revenue recognition changes as they relate to your company and individual transactions.
