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New Revenue Recognition Rules: How to Prepare for the Changes Ahead

September 4, 2018 By PWB

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:

  1. Identify the contract(s) 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 in the contract.
  5. 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 >

Filed Under: Accounting & Auditing, Accounting Solutions, Business Tax, News Tagged With: FASB

IRS: We Disagree with Court Decision Involving Customer Loyalty Discounts

October 24, 2016 By PWB

The IRS recently announced its “nonacquiesence” with a federal appeals court decision that held a retailer that issued loyalty  discounts to its customer was entitled to deduct its liabilities attributable to discounts, which were accrued but hadn’t yet been redeemed. (IRS Action on Decision 2016-03)

[Read more…]

Filed Under: Business Tax, News, Tax Law

Pokémon Go: It’s Not Just for Kids Anymore

August 15, 2016 By PWB

Have you heard of Pokémon Go? It’s a popular smartphone video game that uses Google Maps technology. The augmented reality game pinpoints locations of virtual Pokémon and “PokéStops” in the real world on a map shown on a player’s phone. But it’s more than just a game — some savvy organizations are also using it as a marketing tool. Here’s how.

[Read more…]

Filed Under: News, Tips & Tricks

How the IRS Proves Fraud and Why It Can Be Devastating

March 11, 2016 By PWB

In general, a tax assessment by the IRS is presumed to be correct. A taxpayer can overcome the presumption with proof. That situation is reversed when the IRS asserts fraud. In those instances, the IRS must prove, by clear and convincing evidence, that fraud exists.

[Read more…]

Filed Under: News, Tax Planning and Preparation

The New-and-Improved Research Credit is now Permanent

February 8, 2016 By PWB

The research credit is back — this time for good — and it’s better than ever for some small companies. The Protecting Americans from Tax Hikes (PATH) Act of 2015, signed into law by the president on December 18, does much more than extend this credit. Under the PATH Act, the research credit is restored retroactive to January 1, 2015, and has finally been made permanent. The new law also provides two additional tax benefits that take effect in 2016 for certain employers.

[Read more…]

Filed Under: News, Tax Law

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