Your Revenue Recognition Forecast: Change Is Coming
In 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09—Revenue from Contracts with Customers (ASU 2014-09). Effective for calendar year 2019, the new standard will completely replace many previous revenue recognition standards. Coupled with changes brought about by the Tax Cuts and Jobs Act (TCJA), the new revenue recognition rules could significantly change how you record revenue on your books. They could also impact when you recognize income for federal tax purposes, your financial statement disclosures, and more—regardless of your industry.
The following types of transactions are affected by the new standards:
- Recognizing revenue on the percentage-of-completion model.
- Selling products with a right of return.
- Manufacturing products produced to customer specifications.
- Bundling products and/or services (such as consulting and maintenance, licensing and maintenance, products and warranties).
- Issuing coupons, mail-in rebates, or performance bonuses.
- Installing your own products.
- Granting franchise and royalty rights.
- Selling products as a principal versus an agent (gross versus net considerations).
- Selling products with special payment terms (financing component).
Although 2019 may seem far away, it will be here in a few (!!!) short months. Now is the time to take action to ensure your operations will be in compliance with the new revenue recognition rules. Here are a few things you should do to prepare for the changes ahead:
Be ready for a new 5-step revenue recognition model.
The new revenue recognition model consists of the following five steps, each with details that must be carefully considered:
- Identify the contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
If your organization issues comparative financial statements, your 2018 amounts will be affected—and should be calculated before year-end.
Organizations that issue comparative financial statements have two options for implementing ASU 2014-09:
- Option #1 – Report 2019 amounts under the new rules and leave 2018 amounts under the old rules. The cumulative effect of the new rules on 2018 amounts will then be adjusted through retained earnings.
- Option #2 – Report 2019 amounts under the new rules but restate 2018 amounts to be comparative.
Although option #1 sounds easier, it still requires you to painstakingly calculate the effect on your 2018 amounts and disclose the changes. With this in mind, restating the 2018 balances (i.e., option #2) is not that much more time consuming. In either case, determining the effect on your 2018 amounts should be done now—before the end of the year. This could not only help you learn the new rules prior to 2019 but will also allow you to make any necessary changes to affected policies, procedures, and contractual language.
Examine your accounting method—and determine if a change is needed.
To reduce taxpayers’ cost of compliance and administrative burden associated with the new revenue recognition standards, the IRS released updated procedural guidance (Rev. Proc. 2018-29) for implementing tax accounting method changes in May 2018. Generally speaking, the IRS now allows an “automatic consent method” for accounting method changes filed for the taxable year in which the taxpayer adopts the new revenue recognition standards. If your organization has already adopted the new standards, you may want to examine whether any tax accounting method changes are necessary so you can file in the proper tax year. Keep in mind: filing an accounting method change in a different year could trigger a non-automatic consent request—and a $9,500 filing fee.
Explore new ways of computing your book-tax differences.
Because the new revenue recognition rules could accelerate the recognition of revenue, they could also accelerate the recognition of income for federal tax purposes. Depending on how the new rules affect your organization, the differences between your financial (i.e., book) and tax accounting may become more complicated to determine. To resolve this issue, you may want to consider exploring ways to track your book-tax differences as soon as possible.
Pay attention to changes related to the “all-events” test.
In light of the TCJA’s amendments to Section 451 of the tax code, the all-events test with respect to any item of gross income (or a portion of the item) cannot be met later than when such income is recognized as revenue. This applies to accrual-method taxpayers that have an applicable financial statement. The amendments also provide these taxpayers with an elective method of accounting to defer income for one year on advance payments made during the taxable year.
Not sure where to start? We’re here to help.
We strongly recommend taking action before the end of the year (i.e., within the next couple of months) to comply with the new revenue recognition rules. But don’t worry—we’re here to help you understand exactly how your operations will be affected and guide you through the next steps.
Contact your PWB advisor today.
Call 763-550-1100 or Contact Us >
