Revenue Recognition

Changing Revenue Recognition Landscape

This new report from TechVentive CEO Brian Sommer covers what the new landscape revenue recognition looks like and

Published By - knowledgeNile

New Revenue Recognition requirements will create a significant amount of work for accountants and accounting staff for the foreseeable future. The time required for organizations to comply with the new rules is acutely short. An action is required NOW!

Revenue recognition, like the matching principle, exists to ensure that the recording of a business event accurately reflects the income and expenses of a given transaction or contract across all relevant accounting periods. All firms must adhere to these two principles. Of the two methods of accounting, cash and accrual, most mid-to-large firms use the accrual method. But with this method, companies must exercise additional care as to how and when they record income and expenses. The key to this determination is assessing when five key (or critical) events have occurred. Roughly, these criteria identify when:

  • risks/rewards are now under the control of the buyer
  • the seller has no control over the goods
  • the payment is assured
  • the amount to be paid is known with certainty, and,
  • the costs of goods/sales/etc. are measurable

These rules guide accountants in determining when and what they should book in corresponding accounts during each accounting period. Granted, simple transactions, like the retail point of sale purchases, are easy to record as monies and goods are transferred at the moment. There is no argument over the price and the cost of goods sold. But in other situations, guidance is needed. A partial list of transactions that require special consideration includes those where:

  • payments are tendered over the life of a contract or subscription
  • sellers demand advances or deposits prior to the completion of a sale or delivery of
  • the goods/services
  • sellers offer a warranty that extends beyond the current accounting period
  • the goods are bundled with services that may require several accounting periods to
  • complete
  • commissions (and/or other expenses) are earned over the life of a deal’s term or
  • earned unevenly
  • some or all of the sale is possibly subject to a buyback provision
  • goods can be returned for a full or partial refund for some time after the sale
  • additional products or services are added to the original contract or the term of a
  • a contract is altered

There are also rules that apply when cash is received at a different time than when goods/services are delivered or billed. Likewise, there are rule differentiations based on the kind of asset sold (tangible vs. intangible) or service delivered. Large construction or IT projects (e.g., where percentage completion or other billing methods might be used) present other, specialized accounting requirements. Many industries will be impacted by these changes.

These rules guide accountants in determining when and what they should book in corresponding accounts during each accounting period. Granted, simple transactions, like the retail point of sale purchases, are easy to record as monies and goods are transferred at the moment. There is no argument over the price and the cost of goods sold. But in other situations, guidance is needed. A partial list of transactions that require special consideration includes those where:

  • payments are tendered over the life of a contract or subscription
  • sellers demand advances or deposits prior to the completion of a sale or delivery of
  • the goods/services
  • sellers offer a warranty that extends beyond the current accounting period
  • the goods are bundled with services that may require several accounting periods to
  • complete
  • commissions (and/or other expenses) are earned over the life of a deal’s term or
  • earned unevenly
  • some or all of the sale is possibly subject to a buyback provision
  • goods can be returned for a full or partial refund for some time after the sale
  • additional products or services are added to the original contract or the term of a
  • contract is altered

There are also rules that apply when cash is received at a different time than when goods/services are delivered or billed. Likewise, there are rule differentiations based on the kind of asset sold (tangible vs. intangible) or service delivered. Large construction or IT projects (e.g., where percentage completion or other billing methods might be used) present other, specialized accounting requirements. Many industries will be impacted by these changes.

This new report from TechVentive CEO Brian Sommer covers what the new landscape revenue recognition looks like and who will be impacted, what the options are for fulfilling the new requirements, and key insights into how organizations can successfully transition to the new standards. Read this report to gain an understanding of how your organization will be impacted by the upcoming revenue recognition standards.

 

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