NEW REVENUE RECOGNITION
STANDARD EXPLAINED
I t ’s T i m e To G e t U p C l o s e
A n d P e r s o n a l W i t h Yo u r
R
C o m p a n y ’s R e v e n u e S t r e a m s
evenue is one of your most im-
portant measures of success.
So it seems strange that, before
2014, companies that file Gen-
erally Accepted Accounting Principles
(GAAP) financial statements were al-
lowed to recognize revenue in different
ways. Such inconsistencies resulted in
statements being difficult to read, analyze
and compare across entities, industries,
jurisdictions and capital markets. So, to
combat these disparities, the Financial
Accounting Standards Board (FASB) is-
sued formal revenue recognition guid-
ance to establish principles that require
businesses to report useful information
pertaining to the nature, amount and tim-
ing of a business’s revenue. These new
guidelines are the FASB’s attempt to
provide a little more consistency, clarity,
transparency and compatibility of finan-
cial statements between companies.
ALL REVENUE IS
NOT CREATED EQUAL
Per the new standard, revenue must be
disaggregated and disclosed in a mean-
ingful way for financial statement users.
For example, if you have high sales in a
different state, you may choose to dis-
close how it is broken down because
each revenue stream is governed by dif-
ferent circumstances and risks. In other
words, your company might have mul-
tiple revenue streams even though it
only has one product line. Ultimately, the
more variables you have, such as serving
customers in multiple states, offering a
variety of discounts on similar products,
and revenue streams that utilize any
number of additional performance obli-
gations, the more complicated reporting
becomes. The only way to truly determine
what your company’s revenue looks like is
to take a deep dive into the data.
WHO MUST COMPLY
Only companies that prepare GAAP fi-
nancial statements are required to ad-
here to the new revenue recognition
standards. Those that utilize other re-
porting methods, such as tax basis re-
porting, are not in the line of fire at this
time. Additionally, if you currently issue
GAAP financial statements but aren’t re-
quired to do so by your bank or bonding
company, for example, you might con-
sider changing your reporting practices
to avoid the additional work associated
with implementing the new revenue rec-
ognition standards.
That being said, the revenue recognition
standard update is actually a great ex-
cuse to reevaluate your existing product
lines and pricing models. If a particular
product or service isn’t driving revenue,
then maybe it’s time to try something
else or double down on what works.
The first step is to speak with your CPA,
who will help you determine your best
course of action. Reach out to us directly
to learn more about the new revenue rec-
ognition standard or schedule a meeting
with your existing CPA to review your ex-
isting revenue recognition process.
Note: The new revenue recognition stan-
dard went into effect for public entities
on Jan. 1, 2018. Those in the private sec-
tor were required to adopt the standard
beginning Jan. 1, 2019.
Chris Roush, CPA,
principal,
[email protected]
(Millersburg office)
Katie Snyder, CPA,
supervisor,
[email protected]
(Wooster office)