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In: Accounting

When does the new revenue recognition standard go into effect for private companies and what steps...

When does the new revenue recognition standard go into effect for private companies and what steps can these private companies take to make sure they are able to make an effective transition to the new standard?

Solutions

Expert Solution

It’s understandable that FASB’s new revenue recognition standard might not be top-of-mind for private company finance personnel despite the impending effective date.

The standard takes effect for private companies for annual reporting periods beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019. So effectively, private companies must adopt by the 2019 year end.

The steps that private companies take to make sure they are able to make an effective transition to the new standard

  • Identify your “point person.” Your organization needs somebody in charge of this implementation to make sure it gets done correctly. That’s likely to be someone from the finance department. It’s also important to make sure this person has the support of people from operations, sales, legal, and other departments to help the implementation go smoothly.
  • Determine the resources you will need. Will your point person be able to handle this implementation alone? Will it be necessary to get other help, perhaps from consultants or temporary accounting services? You need to make sure you have the right people to do this job.
  • Develop a timeline. A well-organized set of milestones, roles, responsibilities, and accountabilities will help you make orderly progress.
  • Scrutinize your contracts. The information in your contracts is the key to complying with the five-step revenue recognition process described in the new standard. In some cases, this close examination of your contracts may show you improvements that can be made in operations. For instance, if you find that certain contracts are losers from a revenue perspective, you may choose to renegotiate them.
  • Evaluate systems. “You have to go through the five-step process,” Westervelt said. “Do I have those controls in place, and am I able to implement this? And on top of that, you have to look at, ‘Does my accounting system give me the ability to do this?’” If your system can’t do the job, it may be time for an upgrade.
  • Create strong controls over adoption. If your adoption processes are not airtight, you will be susceptible to problems later.
  • Pick the right transition method. In many cases, the modified retrospective version will be easier for companies to implement. But the full retrospective transition will provide investors and others with more of the information they need to compare the past to the present.
  • Pay close attention to disclosures. One of the principal goals of the revenue recognition standard was to provide investors with more disclosures and useful information than in the past. It’s important to make sure your systems capture the right data to enable those disclosures to be made correctly.

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