Companies have two options when implementing the new Revenue from Contracts with Customers standard, codified as ASC 606. You can take a retrospective approach or a modified retrospective approach. Both approaches require significant effort to account for contracts under both the old and the new guidance before and during the transition year, and clients with whom we’ve spoken express concern that this parallel processing is the greatest single challenge currently offered by ASC 606. Let’s take a quick look at each approach, and offer a few reasons why a company might choose one over the other.
Under the full retrospective approach, you will determine the cumulative effect of applying the new standard as of the beginning of the first historical period presented, and you will recast revenue and expenses for all prior periods presented in the year of adoption of the new standards. If you are considering this method, you have zero time to waste.
Highlights and lowlights:
- Your stakeholders and/or shareholders may demand it
- Useful trend information can be had across all the period presented on your financials
- You must recast previous financial statements as if the new guidance had always existed for a comparative two-year period prior to the adoption year
- It’s likely to require significant time and effort
- If contract volume exceeds even a handful, then finance and accounting automation beyond that provided by Excel spreadsheets will be a necessity
Under the modified retrospective approach, you will apply the new standards to all new contracts initiated on/after the effective date, and, for contracts which have remaining obligations as of the effective date, you will enter an adjustment to the opening balance of your retained earnings account. Under this method you would not restate comparative periods in your financial statements. If you are considering this method, you have very little time to waste.
Highlights and lowlights:
- Reduced effort in restating prior year amounts
- No recasting of past revenue can speed implementation
- Potential for “lost revenue” if the new guidance recognizes less revenue than the previous method would have in a particular period
- Requires you to keep two sets of accounting records in the year of adoption in order to comply with the requirement to disclose all line items in the financial statements as if they were prepared under today’s guidance
- Here too, even a modest number of contracts will demand more accounting and finance automation than Excel spreadsheets can reasonably provide
Regardless of which approach you select, you must endure a period of parallel reporting, where your accounting records must be maintained under both the current and new revenue recognition rules. This is likely to create data, process and system challenges that you should be solving now with the help of specialists in accounting, finance and ERP automation.
Remind me of those dates again
Public companies must be compliant with the new standard for annual reporting periods beginning after December 15, 2017 (i.e., January 1, 2018 for calendar year-end companies). Nonpublic entities must be compliant for reporting periods beginning after December 15, 2018 (January 1, 2019 for calendar year-end companies).
Wondering what other companies are doing?
Various surveys have found a fairly even split between the two approaches, with public corporations tending to favor the full retrospective option and private enterprises favoring the modified option.
The takeaway? The best method for your company may be the method that most other companies in your industry are using. Ask your colleagues, visit trade shows, and consult with the pros before making your decision. But don’t delay.
By BTerrell Group, Texas- based Intacct Partner