Several accounting standard updates (ASUs) are applicable for December 31, 2019 year-ends, and revenue recognition is at the top of the list for many. The Financial Accounting Standards Board (FASB) delayed the new lease standard, and organizations now have one year of experience with new tax reform laws.
The new revenue recognition standard is upon us. Accounting Standard Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606), is effective for nonpublic business entities (non-PBEs) for the year ending December 31, 2019 and outlines a five-step process for recognizing revenue. The five steps within the model are:
- Identify the contract(s) with the customer.
- Identify separate performance obligations in the contract(s).
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract(s).
- Recognize revenue when (or as) the entity satisfies the performance obligation.
Some questions to consider when implementing the new standard include:
- How should variable consideration (such as change orders, claims, back charges, extras, and contract provisions for penalties and incentives) be accounted for? What method will be used when estimating variable consideration, and when will it be included in the transaction price?
- When should two or more contracts be accounted for as a single contract or as multiple contracts?
- How many performance obligations are found within current contracts?
- How will the term of the contract related to service contracts be determined?
- When will mobilization costs be capitalized vs. being expensed as incurred?
- When should uninstalled materials be capitalized as a contract asset as opposed to being expensed to the job?
- Do the warranties offered in contracts represent a separate performance obligation?
This list is not all-inclusive but provides a general overview of a few areas to consider as organizations implement the new standard. Preparers must also consider several new disclosure requirements. Various resources are available through CFMA, the FASB, and the American Institute of Certified Public Accountants to assist organizations with implementation.
On October 16, 2019, the FASB affirmed its previously proposed amendment to defer the effective date of ASC Topic 842, Leases, for non-PBEs for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Although the effective date is delayed for non-PBEs, companies should begin to consider the effects of implementation. The new lease standard will affect the financials of entities that have leases with terms greater than a year, and the impact will vary based on each entity’s mix of owned vs. leased real estate and equipment.
Other ASUs Applicable in 2019
Several other ASUs are effective for non-PBEs with December 31, 2019, year-end reporting dates. A few examples follow:
Effective for March 31, 2019 Reporting Periods:
- Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02)