- Determining the Transfer of Control
- Internal control considerations related to adoption of the new revenue recognition standard
- Revenue recognition issues
- Internal Controls with The New Revenue Recognition Standard
- ASC 606 implementation – don’t forget internal controls and disclosures
Determining the Transfer of ControlApril 19 by Sarah Van Caster. Life is great. You have a decent job with a good pension plan. What you do not know is, although Back to the Future and Phil Collins will both stand the test of time, your pension will not. One small accounting rule will change the way the entire country saves for retirement. The new standard requires companies to change how they account for their pension plans, suddenly making pensions far more expensive. Many companies will choose to phase out pensions and introduce defined contribution plans, the most popular of which are k plans. Fast-forward to your retirement plan has shifted to a k plan, which works for you and the movies you see are now controlled strictly by your children. And, another major accounting rule is about to make a splash in the business world. This change is going to have a global impact on public and private companies. Here is what you need to know:. The guidelines are about the results of your end-to-end processes starting with contracts, through pricing, quotes, orders, and ending with revenue recognition. Private companies are not required to use GAAP standards, but as a general practice, many do to adhere to best practices and encourage external investment. ASC is all about revenue recognition, a process which is historically inconsistent across companies and industries. It is variable because it is messy. Recognizing revenue often has many different factors coming into play throughout the lifecycle of the sale — subscription models monthly fees vs. If you are an organization that processes millions of transactions or generates billions of dollars, you can see where these seemingly endless combinations of revenue recognition can get tricky. The bottom line is rules on revenue recognition have not been strong enough, but the accounting gurus have acknowledged this and ASC is the answer to this current financial challenge. US GAAP requires public entities to apply the revenue standard for annual reporting periods including interim periods therein beginning after December 15,and permits early adoption a year earlier that is, for annual periods beginning after December 15, Nonpublic entities reporting under US GAAP are required to apply the revenue standard for annual periods beginning after December 15, Nonpublic entities reporting under US GAAP are permitted to apply the standard early; however, adoption can be no earlier than annual reporting periods beginning after December 15, Entities that report under IFRS are required to apply the revenue standard for annual reporting periods beginning on or after January 1,and early adoption is permitted. For most in finance, ASC will have a direct impact to some daily tasks. Typically, revenue recognition rules were specific to an industry, at least to an extent. With ASCthese rules are now more general. This means finance resources will not need to necessarily have as deep industry knowledge as was once required, but they do need to learn ASC inside and out. Financial resources will also need to spend more time strategizing around contracts and doing this work may require new skills for some. ASC will make revenue recognition calculations more complicated, potentially requiring new systems to help with processing and forecasting.
Internal control considerations related to adoption of the new revenue recognition standard
That old saying is probably as true for management accountants and other finance professionals as it is for folks in different walks of life. It might resonate even deeper these days as you get ready to roll up your sleeves and face another new set of regulations. Known as ASCRevenue from Contracts with Customersthe standard will improve the financial reporting of revenue and improve comparability of the top line in financial statements globally, the Boards say. Under the new revenue reporting regulations, which would establish a common revenue standard for U. These changes will affect every organization, though to what exact extent will differ on a company-by-company basis. Granted, with the Sarbanes-Oxley Act of SOX and the Dodd-Frank Wall Street Reform and Consumer Protection Act ofthere have been a lot of regulatory changes in the past 10 to 15 years, so a certain amount of organizational fatigue is to be expected. Nevertheless, timely, accurate revenue reporting is critical to compliant operations. If your organization is a vendor, ASC will likely impact you in a number of areas—both inside and outside the accounting department—including contracts with customers plus those with product warranties and returnsbonus plans, expenses, taxes, IT, internal controls, and investor relations. If your company is a customer, you may see changes in how vendors propose contracts or sell products or services to you. Policies and processes will need to be updated, data management will need to be adapted, reporting methods and control will need to be modified, and employees will need to be educated about the changes and how to adhere to the new regulations. Clearly, all of this will involve change at the organizational level. Yet while the changes are spelled out and the steps are established, companies will still need to use their best judgment in implementing the principles-based approach for determining revenue recognition for their own unique structures. Inwhen organizations were required to adapt internal controls to comply with SOX, many companies struggled to implement the necessary changes on time. To a large extent, it was because of a low supply of skilled talent combined with misconceptions about how that talent wanted to work. At the time, it became clear that many employers simply assumed the right people would be available—despite widespread warnings to the contrary. Moreover, the general notion was that companies could bring in external consultants to manage the change. There was also a distinct preference for talent with Big 4 experience since the brand recognition stands for quality, safety, and minimized risk. Unfortunately, though there were many professionals in the Big 4 and other public accounting firms with the necessary expertise pertaining to internal controls, the availability of professionals for the private sector was severely limited—especially because demand suddenly spiked. To complicate matters, many of those who were available were looking for permanent positions. As a result, a huge market developed for permanent finance and accounting talent with internal controls experience.
Revenue recognition issues
What makes it so relevant is the way it will eventually transform how companies go to market—in every industry. Starting now, organizations must reformulate how they package and price their products, in addition to how their sales reps tailor deals. In fact, ASC even affects sales commissions. It is also critical to note that public companies are expected to make these changes by January 1, On the other hand, private companies have until January 1, Another reason why ASC can be so complex is that it is principles-based. This means there are no rules set in stone for compliance. It is an industry-neutral revenue recognition model designed to increase financial statement comparability among companies and industries. The objective is to decrease complexity involved with the current models for revenue recognition. As a result, the new unit of account for revenue recognition is the obligation of a good or a service. In other words, a deliverable. For starters, all U. On a company's financial statements, revenue recognition is simply the notation of revenue. Moreover, the revenue number is used to tally an organization's value and affects both ratios and measurements. As a result of ASCalmost every company will have to utilize a new approach to revenue recognition. Furthermore, there are expanded disclosure requirements, meaning more meticulous records must be kept and reported. When it comes to ASCsome companies will be impacted more than others—especially those under industry-specific guidance. These are the types of companies that will see an impact on their revenue numbers. This matters, because the revenue number is important for items such as agreements and contracts. Plus, the revenue number is looked at in management contracts, loan documents, award-based compensation agreements, buy-sell provisions and more. Many companies will, and already are, consulting with attorneys who are often hired to negotiate and draft various contracts. Attorneys will need to comprehend a company's revenue recognition goals and modify contracts under the new guidelines of the ASC Upon reading, you'll find pages of new guidance. Previously, the U. GAAP directed revenue recognition guidance for industries including:. This is where some confusion comes in with the principles-based method, as the company must use its judgment. Also, here are five steps that must be taken:. Seems simple enough, doesn't it? Not so fast. Each step also relies on new determinations. Plus, every step requires the company's judgment and analysis of the contract's terms and conditions. And, that's not all. Companies will also have to determine how ASC affects their current revenue recognition practices, and this requires a deeper analysis of existing contracts. To illustrate, entities must look at the performance obligations and now decide if the new guidelines will result in revised conclusions around how performance obligations are successfully met and reported. Then, there is the possibility of having to figure out how warranties must be calculated and whether some contracts need to be combined. Not to mention, contract terms are even more important under ASCwhich means new contracts must be drafted in adherence to the guidance.
Internal Controls with The New Revenue Recognition Standard
The certificate courses utilize extensive examples to facilitate learning and allow the professional to practice their skills related to the five-step model. There are six separate courses that are specifically dedicated to practicing your knowledge and applying it to case scenarios specific to each step. The new standard became effective December and it is critical companies properly re-evaluate their current revenue recognition process to ensure they are in alignment with the new standard and the five-step model as follows:. At the surface, the five steps seem simplistic. However, there are many considerations that should be considered within each step based on your process and industry. Transaction and industry specific revenue recognition guidance is eliminated. It is replaced with a principle-based approach for determining revenue recognition. The new standard requires significantly more disclosure than previous generally accepted accounting principles GAAP. The standard affects all entities public, private, and not-for-profit that have contracts with customers. Exclusions include:. In short, you would do this to get better at what you already do, or to get a significant knowledge jump on something you want to do for a living. And, via the certificate itself, to be able to show others that you have attained this knowledge. You would hire this Professional because they bring deep knowledge, on concrete topics, to your team. Simply completing the Illumeo certification denotes that the person is a serious professional willing to take the time to become very good at what they do, and that they put in the time, passed the tests, and are knowledgeable in their area of certification. There is an exam for every course and you must pass every one in order to receive your certification. You may re-study the content and re-take any exam until you pass it. A subscription to Illumeo helps fill out your professional knowledge with its unfettered access to hundreds of up-to-date on demand courses taught by long-time practitioners - just like the instructor of this certification program. Sign In. Sign Up Sign In. Her career has been highlighted by her focus and accomplishments in the fields of internal controls and internal audit and ethics. Fountain has instructed thousands of professionals on the concepts of ethics and compliance and is highly regarded as a subject matter expert in the field. Her thoughts and concepts have been featured in technical publications and leading practice magazines. This course utilizes many examples from many industries to enhance learning of the various concepts of Rev Rec. This course is a continuation of discussion over Step One in the revenue recognition process of Identify the Contract. This course delves into step two of the revenue recognition process relating to performance obligations. This course is designed to evaluate Step Three of the new model dealing with Determining the Transaction Price. This course is the second part in a two-part segment that evaluates the various concepts involved in determining the contract price. This course is designed to evaluate Step Four of the new model dealing with allocating the transaction price. This course is designed to evaluate Step Five of the new model dealing with Rev Rec, which is the final step in applying the new Rev Rec Standard. This course is dedicated to the evaluation of case scenarios related to Step Four and Five of the revenue recognition model. This course briefly outlines each of the five steps for ASC and provides case studies for each. This course briefly outlines each of the five steps and then works through various exercises and scenarios covering each of the steps. Completion Award. Continuing Education Credits: Brief Certification overview video. Resources Testimonials Whitepapers Blog Instructors. Contact Sign Up.