The Financial Accounting Standards Board (FASB) released new Revenue Recognition Regulations that must be complied with by all private and public companies in all industries by 2017. The changes are wide sweeping to say the least. For many business owners, the new standards are overwhelming.
Five Step Reporting Process
The new five-step process for revenue recognition is as follows:
1) Identify the contract with the customer.
2) Identify the performance obligations (promises) in the contract.
3) Determine the transaction price.
4) Allocate the transaction price to the performance obligations in the contract.
5) Recognize revenue as the reporting organization satisfies a performance obligation.
Application Illustration
A very simplified example of an application of the revenue recognition standard for a service business would be in the case where a Business Consulting firm had a three-year contract with a medical firm. This example is provided for illustration purposes and is not to be considered accounting or legal advice.
Assume the Business Consulting firm contract specified that in the first year the Business Consultant would provide recommendations for increasing the medical firm’s revenue by ten percent for a fee of $48,000 payable in twelve monthly payments of $4,000. The second year the Business Consulting firm would install software that would track the required revenue growth for $50,000.
Information Required
Organizations will be required to capture information from all sales contracts related to revenue with a customer. Revenue recognition is always fluid. This is particularly true when agreement terms are updated or new performance requirements are added to the contract.
There is a technical accounting assessment that must be completed in advance of implementing any part of a proposed compliance solution. It is imperative the intricate standards be fully understood before any accounting software system changes are attempted. Potential parallel reporting requirements and impacts should be analyzed fully before proceeding with any implementation methodology.
It can take six to twelve months for a professional trained in the application of the standards to get a business to the point where it has a working knowledge of the complex rules. Businesses must start preparing for the vast reporting requirements right now. Early adoption is not only recommended, it is critical for successful compliance.
Collaboration Is Vital
The best way to prepare for the new standard should be iterative and dynamic as opposed to sudden and static. Excellent teamwork and collaboration will be required throughout all departments including Strategic Planning, Accounting, Finance and Human Resources (HR). Teams should be co-located as much a possible with regular and consistent communication channels in place to organize and share all the required data.
Hire an Interim CFO
One of the best ways to create and install the required compliance system is to hire an interim Chief Financial Officer (CFO) who is trained in the stringent reporting requirements. The CFO can set the initial course of the initiative, keep it on course and plan for future compliance.
Having an independent professional involved from the beginning gives that person the objectivity they need to gain insights that normally are not available from within the organization. The financial expert comes in, completes the job and then supports the accounting department with any ongoing maintenance work that might be required. Pacific Crest Group’s outsourced CFOs are fully trained for this purpose.
How We Can Help You
Pacific Crest Group (PCG) provides professional services that keep your business focused on your critical objectives. We provide strategic Accounting and Human Resource (HR) services created specifically to help you meet your goals. Through exemplary customer service, clearly defined policies and procedures as well as a forward-looking perspective, we provide the outsourced solutions your business needs to grow. A PCG professional is happy to meet with you to discuss solutions for your unique requirements designed to maximize all of your business opportunities.