Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606),” requires you to follow a five-step process when recording revenue for financial statements.
These steps include identifying contract and performance obligations, determining transaction price, allocating towards performance obligations, and recognizing revenue when performance obligations are satisfied.
While privately held companies have had several years to comply with the standard, many are finding it difficult to manage. Compliance requires a significant amount of information gathering, estimating, and documenting. These challenges include:
Accessing the right data. Accounting departments must gather input from many other departments and sources to properly identify performance obligations and transaction pricing. Many companies have underestimated the amount of time and effort required to collect and process this information.
Documenting decisions. For some companies, the new standard won’t affect reported revenues. Even so, the company has to document its decisions about what it’s reporting. This requires work and research by in-house accounting and financial teams.
Uncovering all the costs. It’s not always clear what falls under a particular revenue stream. For example, customer-reimbursed pre-production costs, such as tooling, may or may not fall into an identified stream, depending on the specific circumstances. On the other hand, costs to obtain contracts should definitely be recognized, and the company must decide when and how to accurately account for them.
Dealing with complications. Meeting the new standard may require some analysis. For example, promotional discounts or a promise of free goods in the future might require splitting revenue based on standalone pricing, versus material rights. These are not straightforward allocations and determining them may take time.
New rules require an overall change in thinking about contracts and revenue. Should you have any questions, please consult your Mueller Prost specialist for support.