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New Revenue Recognition standards impact multiple industries and departments

Boston Business Journal
September 17, 2018
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As seen in the Boston Business Journal

The accounting and finance industries have been abuzz with the recent changes to the Revenue Recognition standard.

This new standard has been in the works for almost 15 years and represents one of the largest changes in the history of accounting. As a result, many business owners are wondering, “What does this new standard mean to my business going forward?”

What is Revenue Recognition?

Revenue Recognition is a generally accepted accounting principle (GAAP) that regulates the conditions in which revenue is “recognized,” or accounted for. Revenue is typically recognized when a critical event takes place, and the amount of revenue is measurable. There are certain situations where exceptions may apply, as outlined by the guidelines.

About the new standard

Businesses across all industries will be impacted by the new standard, both in day-to-day transactions, and financial reporting perspectives. The new standard does the following:

  • Aims to improve consistency and comparability of revenue recognition across industries
  • Changes from a rule-based to a principle-based model
  • Introduces a greater element of judgement

Considerations by industry

  • Manufacturers that provide deliverables in addition to their main product (i.e. service, warranty, and shipping), may now need to recognize those revenues separately.
  • Distribution companies basing their revenue recognition on the transfer of control to customers may now have to shift to a different point in the process based on various indicators rather than the bill-of-lading date.
  • Construction contractors may now be required to treat change orders as separate contracts while contracts covering various locations may now be considered one “performance obligation,” and thus, one contract.

Operational impact

The implementation of this standard will require the expertise of more individuals than just the finance and accounting departments. Almost every department in your organization will be affected by the new standard in one way or another, including the following:

Sales and marketing departments will need to learn new ways to evaluate and negotiate contracts. The sales force should recognize that there may be new opportunities for bundling products and creating new sales models, which could create prospects for structuring incentivized customer deals.

  • Legal teams will be required to adjust the standard agreement templates and terms to ensure that customer contracts coincide with the requirement of the new revenue recognition standard. Certain terminology, such as “termination rights,” “liability,” and “rebates/discounts,” may change the performance obligations, thereby changing the timing for revenue recognition.
  • Human resources will need to analyze compensation and benefits, specifically around sales personnel, to determine if incentives and payouts should change in order to better align with financial reporting requirements for the recognition of customer contract revenue.
  • IT departments will be tasked with adapting existing control frameworks within the general ledger or ERP system to align with the new processes and controls designed as a result of the adoption of the new standard.
  • Finance and accounting departments will be the most affected by these changes, and should consider: Projected revenue and related expense budgeting; tax planning and associated dividend or distribution payouts; compliance with debt covenants; performance measurements; exit strategy planning; and valuation calculations.

Firm-wide implementation strategy

Business owners should establish an implementation strategy as soon as possible, involving all departments in the organization. Without input and involvement from all departments, implementation may take longer, be more cumbersome, and potentially lack attention to certain details.

This collaborative strategy should continue past the initial implementation stage to ensure that the best business decisions possible are made. Consult with your trusted financial and business advisors to get started, and keep them in the loop to ensure all of the necessary aspects of the new standards are taken into consideration.