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Articles From Lumsden McCormick

Private Companies: Have you Implemented the New Revenue Recognition Standard?

Private companies that follow U.S. Generally Accepted Accounting Principles (GAAP) must comply with the landmark new revenue recognition standard in 2019. Many private company CFOs and controllers report that they still have significant work to do to meet the demands of the sweeping rules. If you haven’t started the implementation process, it’s time to get the ball rolling.

Lessons From Public Company Peers

Affected private companies must start following Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606), the first time they issue financial statements in 2019. For private companies with a fiscal year end or issuing quarterly statements under U.S. GAAP, that could be within the next few months. Other private companies have until the end of the year or even early 2020. No matter what, it’s crunch time.

Public companies, which had to begin following the standard in 2018, reported that, even if the new accounting didn’t radically change the number they reported in the top line of their income statements, it changed the method by which they had to calculate it. They had to comb through contracts and offer paper trails to back up their estimates to auditors. Public companies largely reported that the standard was more work than they anticipated. Private companies can expect the same challenges.

An Overview

The revenue recognition standard erases reams of industry-specific revenue guidance in U.S. GAAP and attempts to come up with the following five-step revenue recognition model for most businesses worldwide:

  1. Identify the contracts with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations.
  5. Recognize revenue as the entity satisfies a performance obligation.

In many cases, the revenue a company reports under the new guidance won’t differ much from what it reported under old rules. But the timing of when a company can record revenues may be affected, particularly for long-term, multi-part arrangements. Companies also must assess:

   - The extent by which payments could vary due to such terms as bonuses, discounts, rebates, and refunds,
   - The extent that collected payments from customers is “probable” and won’t result in a significant reversal in the future, and
   - The time value of money to determine the transaction price.

The result is a process that offers fewer bright-line rules and more judgment calls compared to old U.S. GAAP.

We Can Help

Our accounting experts can help you avoid a “fire drill” right before your implementation deadline and employ best practices learned from public companies that made the switch in 2018. Contact us for help getting your revenue reporting systems, processes, and policies up to speed.

© 2019

Private Companies: Have you Implemented the New Revenue Recognition Standard?

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Doug is a principal in Lumsden McCormick’s accounting and auditing department and has been with the Firm since 2008. Prior to joining the Firm, he worked at KPMG for three years. Doug is responsible for the supervision of staff and planning and completion of client engagements including audits, reviews, compilations, and other bookkeeping and consulting engagements. He has prepared financial statements, coordinated and reviewed work performed by internal auditors, and presented audit findings to management. Doug has experience providing services to financial institutions, workers’ compensation trusts, employee benefit plans, and other commercial businesses, including those in manufacturing, construction, and general service industries. Additionally, he has experience working on SEC engagements. Doug is a member of the Firm’s recruiting team and chairs the Firm’s Accounting & Auditing Technical Committee.

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