Timing is Everything With ASC 606: The New Revenue Recognition Standard

In effect, the change shifts US practices to judgment-based rather than heavily rules-based when it comes to recognizing revenue—freeing up organizations to apply reasoned judgment and enterprise-specific context rather than highly prescriptive rules. In May 2014 the Board issued IFRS 15 Revenue from Contracts with Customers, together with the introduction of Topic 606 into the Financial Accounting Standards Board’s Accounting Standards Codification®. IFRS 15 provides a comprehensive framework for recognising revenue from contracts with customers. In December 2001 the Board issued SIC‑31 Revenue—Barter Transactions Involving Advertising Services.

This would seem to provide a clear area for possible manipulation unless there are sufficient internal controls in place. Another key area for auditing will be whether the pattern and practice of doing business is the same as the contract performance terms and conditions. Now take this same concept into the FCPA realm around vague deliverables in third party agent’s agreement and you https://kelleysbookkeeping.com/what-is-the-expanded-accounting-equation/ begin to see some additional issues. If the performance deliverable terms are so vague as to render them meaningless, how will that be handled under this new revenue recognition standard. Another obvious area of change will be in commission payments for sales persons and third parties. Previously they may have been paid when the revenue was recognized over the life of a contract.

Step Model For New Revenue Recognition Standards

But, the rule has a material impact on every software company I’ve analyzed so far. While every company that files under GAAP is subject to the new rule, the impact can vary widely. Some companies, like US Steel (X), saw no change to their financial statements.

When the trend in a company’s NOPAT and its free cash flow diverges in this manner, investors need to focus on free cash flow. Figure 1 also shows that VRNT’s selling, general, and administrative expense declined by $14 million, primarily due to the capitalization of commissions The New Revenue Recognition Accounting Standard paid to agents and sales personnel. As a result, VRNT received a $51.5 million boost to net income last year, which significantly impacted NOPAT as well. Set the End Date for current fair value records to the last day of the period prior to the transition period.

Applying the revenue standard

This lack of standardization in financial reporting has made it difficult for investors and other consumers of financial statements to compare results across industries, and even companies within the same industry. In addition to changing the way companies recognize revenue, the new rule impacts some of the expenses related to how companies obtain and satisfy contracts with customers. For example, companies now have more discretion to capitalize sales commissions for long-term contracts. Rather than being expensed immediately, these commissions are now recognized as contract assets on the balance sheet and amortized over the life of the contract. The latest accounting standards are shifting the way technology, media and entertainment, and telecom (TMT) companies recognize revenue. While in the past, changes like these primarily impacted finance departments, the new accounting standard also means big changes for strategy, information technology, human resources, sales and marketing, and tax.