Fall/Winter 2016-2017 | BWD 17
4 steps to preparing for a big accounting change
By Magdalena Marriott, CPA, MBA, CISA, and Stephen Chang, CPA
The new revenue recognition standard requires companies to
apply a five-step model to recognize revenue from customers.
The five steps are:
1. Identify the contract with a customer.
2. Identify each performance obligation in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to each performance
obligation.
5. Recognize revenue when or as each performance
obligation is satisfied.
The new standard will also require:
• A substantial increase in the amount of disclosures needed
to describe the company’s revenue process and contracts.
• Important management judgment calls regarding
accounting for revenue recognition.
These changes will have a far-reaching impact on
organizations’ policies, processes and systems. If this all
sounds a bit intimidating, don’t worry. Here’s how to prepare.
1) Establish a team
The key to success in implementing a standard of this magnitude
is pulling together the right team. This cross-functional
implementation team should include participants from different
company functions. We suggest creating your team with
colleagues from accounting, tax, information technology (IT),
engineering, sales and marketing, and human resources.
2) Perform a readiness assessment
The implementation team should perform an assessment to
review existing contracts. They’ll seek to determine:
• How the existing contracts should be accounted for
under the new standard.
• Whether the company’s systems and processes are
capable of accommodating the new requirements.
Understanding your contracts and system capabilities is vital to
determining your organization’s readiness in a timely fashion.
3) Select a transition method
The standard requires companies to transition using one of two methods.
Those methods are:
Modified retrospective method
Under this approach, companies 1) recalculate revenue using the
new standard for all contracts not completed by the adoption date,
and 2) record a cumulative-effect adjustment to the opening balance
sheet for the year of adoption.
The adjustment reflects the difference, as of the adoption date,
between the cumulative revenue the company recognized under
current GAAP and the amount it would have recognized had it
applied the new standard to those uncompleted contracts.
Under this approach, the company need not restate comparative
prior-year periods. But it must disclose the impact of the new
standard on each financial statement line item in the year of
adoption, and explain the reasons for any significant changes.
Full retrospective method
Under this approach, companies must restate revenue for all prior
periods presented in their adopt