If your business prepares financial statements in accordance with generally accepted accounting principles, then please be advised that a significant change will take effect next year which determines when and how you recognize revenue.
The Financial Accounting Standards Board (FASB), which issues new standards for generally accepted accounting principles (“GAAP”), has revised the accounting for revenue recognition. The changes for revenue recognition are effective for private companies for fiscal years beginning after December 15, 2018, covering calendar year 2019 and any interim periods starting January 1, 2019. Although most annual financial reporting for private companies will not be prepared until the beginning of 2020, if you have financial reporting recorded in accordance with GAAP, it is important to focus on this now, since these accounting rules may significantly impact financial reporting and loan covenants.
These new rules cover all revenue arising from contracts with customers and affect all entities that enter into contracts to provide goods or services to their customers, which in general, will affect almost all entities. Previously there was either no guidance or guidance was spread over many FASB rules.
The new standard requires a company to recognize revenue to record the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This procedure is broken down into five steps:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies a performance obligation.
At a glance, these five steps seem simple, and for certain entities the implementation of ASC 606 could be. However, each of the five steps involve intricacies when considering the terms of the contract and all of the underlying facts and circumstances, including certain terms, certain language and other items contained in a contact. There is also implementation guidance and disclosure requirements which are included in ASC 606, which covers revenue recognition.
At Janover, we are dedicated to assisting your business in the implementation of the revenue recognition guidance and are here for you and your business. Please feel free to contact your Janover trusted advisor.