Weighing the options for implementing the new revenue recognition

As private companies apply the new revenue recognition standard, they have two options for reconciling their 2019 financial statements with those from 2018, which was under the old guidance.

“We told our clients to keep detailed records, so it would be easier to bring the two systems together,” says George Pickard, principal of the Audit and Accounting Service Department at Ciuni & Panichi Inc.

However, no matter how prepared, it’s still burdensome to change how you recognize revenue when you enter into contracts with customers to provide goods or services. That’s why standard setters allow organizations to either retrospectively restate 2018 financial statements or follow a cumulative approach.

Smart Business spoke with Pickard about the benefits to each method, where to get additional implementation help and the need to educate financial statement users.

How should a private company decide which method to follow?

One option is to restate your 2018 financial statements and make changes to your income statement, as if the new revenue recognition standard was in place. Practical expedients to make this easier, include:

  • Completed contracts that began and ended in the same annual reporting period do not need to be restated.
  • For completed contracts with variable consideration, the transaction price at the date of completion may be used, rather than estimating the amounts.
  • The disclosure of outstanding performance obligations and how much revenue is tied to those can be skipped.
  • Retrospective restatement of the contract is not required for contracts that are already modified.

The other option is to cumulatively apply the standard. You keep your 2018 numbers, but you still adjust your beginning equity for 2019. Then, you disclose which line items of 2019 have been affected by the new standard and what they would have looked like under the old guidance.

The decision between the two needs to be taken on a case-by-case basis. Restating makes it easier for financial statement users to look for trends, but it may be time consuming and burdensome. If, for example, you’re planning to sell your company in the near future, the ability to have multiyear comparisons that give a clear picture may be worth the effort. On the other hand, if you have a lot of contracts that are now completed and it will be very difficult go back and get all of the necessary details, the cumulative method may be better.

What assistance is available for implementing the new standard?

Beyond working with your accountant, the American Institute of Certified Public Accountants (AICPA) has come out with audit guides specific to revenue recognition. It also put together task forces that looked at 16 industries and implemented the new standard, giving detailed examples of how to carry out this revenue recognition. If your organization falls under aerospace and defense, airlines, asset management, broker-dealers, construction contractors, depository institutions, gaming, health care, hospitality, insurance, not-for-profit, oil and gas, power and utility, software, telecommunications or timeshares, you should look at these.

The AICPA also is coming out soon with a revenue recognition tool kit.

Why is it critical to educate users of your financial reporting about what to expect?

If banks, stakeholders or shareholders use your financial statements because they loaned you money, you don’t want them to be caught off guard, especially when agreements incorporate covenants. If revenue is recognized earlier or later than it used to be, you may fail a covenant under the new standard.

In addition, some bonus compensation and other agreements with employees are tied to revenue. The new standard may change the timing of revenue reporting, which could change whether people hit a goal. It may be a case of rewriting the agreement or a having conversation upfront with your employees.

The more communication that gets out, the less stakeholders, banks, employees or other users of financial statements will be surprised. You need to share what they should expect to see for the 2019 period, and if you’re issuing interim statements, you’ll want to have those conversations a lot sooner.

Insights Accounting is brought to you by Ciuni & Panichi Inc.