The date for the new revenue recognition standard may seem a long way away, but it's a good idea for all companies most affected by the change should start preparing now. The Technology industry is one of the most impacted industries today because their model is going to change, this drives systems issues and tech startups having to deal with different business rules.
One key change is that the new standard allows for a lot of judgments and more flexibility so ensuring there are consistencies across reporting is of paramount important today.
On the flip side, businesses should be able to get financial statements the actually reflect the economics of the business, so all in all you should understand the technical impact and the broader impacts for the wider organization such as your operating model, systems and processes that need to adapt to this regulatory change.
Being a global standard, a joint one with FASB and IFRS, this should in theory level the playing field between the US and the rest of the world. US and UK tech companies can talk about the rules and be on the same page, in the past we have seen clients having a strict product roadmap because they are constrained by the accounting rules, for example, if there is a promise of a future deliverable today or future functionality to a customer, in the past, revenue would often be subject to full revenue deferral whereas under the new rules the accounting answer won’t be as negative - there will be a deferral but not as much. So what’s the process?
The 5-step revenue recognition model
It is a 5-step model with how you recognize revenue, it goes like this:
- Identify the contract with the customer
- Identify the performance obligations (the goods or services to be delivered to the customer)
- Determine the transaction price (basically means how much you get paid for those goods and services)
- Allocate the total contract value between the goods and services that will be deliver
- Recognize revenue as you deliver the goods and services
On the face of it, this looks pretty similar to what you may do today but as the reality creeps in as you drill into the steps - the devil is in the detail, and there is some pervasive changes to more than just the accounting that will impact every tech start up.
There are some areas of the standard that are likely to change but not the main areas which does provide clarity. For example, it is common for companies in the technology industry to modify contracts to provide additional goods or services, which may be priced at a discount. A modification is accounted for as either a separate contract or as part of the existing contract. This assessment is driven by
- whether the modification adds distinct goods and services and,
- whether the distinct goods and services are priced at their standalone selling prices.
This determination may require judgment, as you can see and is typical when for example a startup sells software and maintenance to a customer in an initial transaction and then modify the arrangement to extend the maintenance period.
The above is a taste of what’s the come, and we recommend being prepared for the new revenue standards. We’re here and ready to support you with your implementation efforts on revenue today, contact us the team.