Get Private Companies Ready for the New Revenue Standard
By Joseph Radigan
Auditors of private companies are reviewing clients’ efforts to prepare for filing financial statements under the new revenue recognition standard in early 2020.
In the five years since FASB adopted its landmark guidance in Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers (Topic 606), companies large and small have had to race to implement the standard by its effective date.
Public companies began complying with the standard with their regulatory filings for the first quarter of 2018. Now the focus has shifted to private companies, which, in little more than half a year, are going to prepare their first set of annual financial statements with the new standard. Private company financial statements for interim reporting periods will have to comply with the standard in 2021.
In some cases the new standard may not affect companies’ reported revenue. But even private companies that don’t have a significant change to the top line of their income statements will have to satisfy additional requirements for footnote disclosures. The new standard also requires an increase in the use of estimates that will require documentation of the judgments used by the client’s management. Here are some items auditors can use as a checklist to help them gauge how well clients are preparing for the new standard’s requirements.
Assess how well the client is prepared to implement the standard. In many cases, engagement teams from BDO USA LLP are meeting or have already met with clients’ executives, said Michael Stevenson, CPA, the national practice leader for the firm’s accounting and reporting advisory services group in Dallas. The engagement teams are evaluating how well clients sized up their sources of revenue and the processes they use to execute customer contracts and enter them into the financial reporting system.
“The first step in the process is just helping management identify that there’s a call to action here that is different in the past,” Stevenson said. “There are a good number of private companies who have really looked at this as an opportunity to evaluate the business, how they interact with their customers, and how they set terms and conditions within their contracts, and they’ve put themselves in a really good spot as far as the adoption goes.”
Make sure the client is ready to follow FASB ASC Topic 606’s five-step process. The standard’s five-step process requires companies to identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the price to the performance obligations, and recognize revenue when a performance obligation is satisfied.
“They really should start their thinking from the beginning. … Who are the customers? Let’s look at the contracts,” said Douglas Reynolds, CPA, a partner in Grant Thornton LLP’s accounting principles group in Boston. “The unit of account is the contract. Then try to figure out what we promised the customer, then the price, then we allocate it to the things we’re providing, and then we figure out, when do we recognize the revenue.”
Help clients understand the new standard’s documentation requirements. For many companies, the reported revenue won’t change once they’ve completed the transition to Topic 606. But clients will have to produce more documentation to support their decisions about reported revenue.
“That’s frustrating because people are trying to run a business,” Reynolds said. Most private companies lack large staffs in their accounting policy departments and can’t do the necessary research. The time that management has to spend producing the documentation takes them away from running the business.
Are the notes to the client’s financial statements in order? The new disclosures that are required to explain the changes to comply with the new standard will take time to prepare, Reynolds said. He advised private companies that compete with public companies to review the disclosures in the regulatory filings of their competition and glean from them how the disclosures should be handled.
“Even if they don’t feel that the monetary or the numerical change is significant, if any, there’ll be some new note disclosures that we’ll need them to have a handle on, too,” said Richard Reisig, CPA, a shareholder and director in attest services at Anderson ZurMuehlen & Company PC in Great Falls, Mont. Reisig also is a member of FASB’s Private Company Council.
Continue meeting with clients and evaluating their progress. Reisig said auditors should review clients’ sources of revenue and determine if the timing in which it is recognized will change with Topic 606. The timing of the recognition is determined by the transfer of control of the good or service, and auditors and clients will have to determine which revenue streams are recognized at a point in time and which are recognized over time.
“Even if you don’t think it affects you a lot, we’re going to need this information from you, so let’s start gathering that now,” Reisig said.
Grant Thornton’s Reynolds said that with little more than six months to go before the end of the year, auditors will need to push clients to ensure that they can prepare financial statements that adhere to the new U.S. GAAP requirements. If for some reason they won’t be able to comply with the standard, the sooner they know about the nonconformance with GAAP, the more time they have to address it.
“I don’t think a company would want to call a bank in January 2020 and say, ‘We just figured out that when we get done closing the books, we might need a waiver,’” Reynolds said. “They need to know what’s going to happen before the period’s over to work with their lenders.”
Source: Journal of Accountancy, June 27, 2019 (https://www.journalofaccountancy.com/news/2019/jun/revenue-recognition-standard-private-companies-201921401.html)