CPA Practice Advisor - 30

FEATURE
ASC 606: Don't Delay Implementing New
Revenue Recognition Standard
By Yaury A. Jattin and Tanya Ferreiro

IF YOU HAVEN'T started making changes in light of the new revenue
recognition standard, it's time to get with the program. Accounting
for revenue has now become much more complex, and those who
delay adopting the new rules could face serious business risks.
The new Accounting Standards Codification Section 606 standard may change
the way your company records revenue
and structures deals and contracts. If you
don't adopt the new rules, you will not be
in compliance with Generally Accepted
Accounting Principles (GAAP) and could
therefore jeopardize relationships with
your bank, investors and other critical
stakeholders who rely on your financial
statements.
ASC 606 is effective for annual
reporting periods beginning after December 15, 2018, for non-public companies.
It's a more principles-based approach
that provides a single comprehensive
framework for recognizing revenue.

5-STEP PROCESS FOR
CONTRACTS
The new revenue recognition standard
was developed in an attempt to condense
numerous regulations and interpretations, and to improve the way companies account for revenue and deferred
revenue.
ASC 606 outlines five key steps for
customer contracts:
Identify the contract: The first step
is to identify the contract, which
establishes enforceable rights and
obligations with the customer. All parties
must have approved the agreement and
be committed to their obligations. Each
party's rights and payment terms must
be identifiable, the agreement must have
commercial substance, and collection must
be probable.
Identify performance objectives:
Next, you need to identify all performance obligations (i.e., promises

JUNE 2019 ■

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to transfer distinct goods or services to a
customer) in the contract. In addition to
obligations that are defined in the contract,
you should consider any obligations the
customer may reasonably expect based on
past experiences with your organization.
Determine the transaction price:
How much do you expect to be
entitled to for transferring promised
goods or services? The transaction price
can be fixed, variable or both.
Allocate the transaction price: You
then need to allocate the transaction
price to the performance obligations
in the contract based on the stand-alone
selling price of each performance obligation.
Recognize revenue: Finally, the
allocated amounts mentioned above
are recognized as revenue when
or as the performance obligations are
satisfied. Revenue is recognized over time
if certain criteria are met. If not, revenue
is recognized at a point in time.
The steps above are more complex
than they may seem, and many companies have struggled with the transition. The analysis and corresponding
documentation should be completed
well in advance of year-end reporting
requirements. Addressing ASC 606 can
be a complex, time-consuming endeavor
for many companies and may require
time and effort from both internal and
external resources.

TAX IMPLICATIONS OF
REVENUE RECOGNITION
CHANGE
The new revenue recognition standard
will impact taxes in addition to financial
reporting. The IRS currently requires

companies to file Form 3115 to request
a change to certain accounting methods
for recognizing revenue - for the year
they adopt the new rules under GAAP.
Some of the method changes are considered automatic, which means that no
consent is required and that no payment
is due when filing Form 3115.
Further IRS guidance is also expected
around questions related to: the definition of an applicable financial statement;
the taxation of changes in estimates
within the applicable financial reporting
framework; the treatment of advanced
payments; and the taxation of amounts
recognized in retained earnings. Moreover, companies that see an acceleration
of income tax due as a result of revenue
recognition changes may require additional planning for income tax strategies,
the timing of payments from customers,
and more.
As a business leader, it is your responsibility and proper corporate governance
to implement the new revenue recognition standard at your company - but it's
complex. You may want to speak with
your CPA to learn more about the new
standard and what your company needs
to do to comply by the deadline. ■
Yaury A. Jattin, MST, CPA, is a principal in
Kaufman Rossin's tax services practice and
leader of the firm's public companies industry
advisory group. Kaufman Rossin is one of the
Top 100 firms in the U.S. You can reach Yaury
at yjattin@kaufmanrossin.com.
Tanya Ferreiro, CPA, is a principal and chair
of Kaufman Rossin's audit practice and
leader of the firm's nonprofit industry group.
Kaufman Rossin is one of the Top 100 firms
in the U.S. You can reach Tanya at tferreiro@
kaufmanrossin.com.

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