New Revenue Recognition Standards and How It Impacts Your Contracts

New Revenue Recognition Standards

 

When you work on finance or legal teams, many business law changes at the federal level can complicate your work and bring headaches and confusion to your business.

In this instance, we’re talking about the New Revenue Recognition Standards – an accounting update that is presenting challenges for enterprises across all industries in the areas of revenue allocation, price and contract changes and disclosures.

What Exactly are the New Revenue Recognition Standards?

In May of 2014, the Financial Accounting Standards Board issued an Accounting Standards Update called the Revenue from Contracts with Customers. This standard provides companies with a single model for use in accounting for revenue arising from contracts with customers.

The main difference of the newer model is that it recognizes revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer, as the old model did.

If you’re starting to panic slightly because this is the first time you’ve heard of these standards, relax (a little), the effective date for public registrants has been pushed back to 2018, though companies are allowed early adoption. This delayed effective date ensures you have time to become compliant.

Having said that, it’s worth mentioning that some areas of the new Accounting Standards Codification may require more time to get your organization up to speed, particularly in the areas of revenue or billing systems. Performing a preliminary analysis of the new requirements is advised.

What does this mean for your team?

There is little doubt that these updated requirements are creating challenges for just about everyone. But legal and finance teams must remain particularly vigilant against these newly-introduced complexities. Many companies will need to go back and review all previous customer contracts, and many will have to back to the inception date of the company. For some this could be 25+ years!

Contract combinations and modifications

Talk about confusing! The New Revenue Recognition Standards may require a company that enters into multiple contracts at or near the same time with the same customer to be accounted for as a single contract when the pricing or economics for those contracts are interdependent. This means that all contracts will need to be reviewed and evaluated together to determine separate performance obligations and how transactional prices should be allocated.

You may also need to make adjustments when it comes to contract modifications, which may require you to enhance your contract management systems and tools.

Capitalization of costs to acquire customers and contracts

Until now, you weren’t required to identify or account for the capitalized costs associated with contract management. The new standard, however, requires certain contract costs, such as those necessary to acquire a contract with a customer (ie – sales commissions), to be capitalized and amortized. You will most likely need to develop or enhance processes, controls, and systems to identify and account for such capitalized costs.

Disclosures

You can expect disclosure requirements under the new standard to be significant and require modification to your financial and management reporting processes and systems. Some additional disclosures will include (but are not limited to):

  • Disaggregation of revenue.
  • Certain information about changes in contract asset and liability balances and contract costs.
  • Information related to the amount of the transaction price allocated to performance obligations not yet satisfied.
  • Professional services revenues vs. technology revenues and how to allocate each of them over the length of an agreement.

Where can you go from here?

If you’re feeling overwhelmed, you’re not alone. In-house legal and finance teams have enough on their plate without having to worry about developing new processes and systems to remain compliant and mitigate legal risks.

That’s where LinkSquares has helped hundreds of companies like yours.

Our proprietary contract analysis and reporting system allows you to easily index, search and report on all customer contracts and vendor agreements. This cuts down on manual review time, outsourcing costs, and helps you remain safe and compliant, no matter what new regulatory changes come down the pike.

If you need help getting ready for the New Revenue Recognition Standards, get in touch with us today.

 

 

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