The deadline may seem far away but in reality it’s right around the corner
A popular and hot topic these days is the newly issued revenue recognition rules, a result of a decade long effort by a collaboration of FASB and IASB. These rules are being phased in in the near future and will affect a variety of business enterprises, primarily those who have contracts and special delivery arrangements with their customers.
Revenue recognition is an accounting topic familiar to many companies who are engaged in providing goods and services to their customers. It deals with the rules on when to recognize revenue for various products shipped or delivered, or services provided, and in what amounts in each accounting period. It requires deferring revenues when applicable and then recognizing them in future periods, following specific rules issued by FASB.
The new rules, issued in May of 2014, require companies to examine their customer contracts and determine for each sales invoice what amounts can be recognized in the period of delivery and what must be deferred to future periods. These new rules will become effective for reporting as early as 2017 with tracking of revenue transactions as early as 2015 with an adoption method either full retrospective or modified retrospective. Generally, it makes recognizing revenues, both for products and services under more conservative guidelines.
What this implies is that accounting for revenue must be done according to the revised rules, which makes companies affected by these rule changes dependent on their ERP or accounting software to help them manage these revenue recognition transactions. In addition to the accounting and finance functions, the new revenue recognition rules will affect the legal department, tasked with creating, reviewing and interpreting customer contracts, sales, and IT.
As of this writing many ERP and accounting software vendors are working on implementing these new rules into their existing software. Other, vertical market software vendors, will be offering revenue recognition software that will be interfaced with existing ERP software to provide the needed functionality and allow for both internal and external audit of revenue recognition.
Similar to actual accounting software, companies who implemented a dedicated planning, budgeting and Analysis solution are going to have to re-think the revenue recognition planning and budgeting process in a similar fashion to actual accounting in order to make their analysis meaningful.
This is particularly true for companies who use their planning, budgeting and analysis software as an extension of their actual accounting software. A software application like Budget Maestro with Analytics Maestro by Centage Corporation, which is an extension of the actual accounting system into future periods allows its users to adapt any accounting change rules and match its core structure to the General Ledger of its linked accounting software.
Although it appears that there is plenty of time left to make the switch to the newly adopted revenue recognition rules, prudent accounting and finance managements realize that now is the time to start working towards implementing the changes, including acquiring additional IT tools and modifying existing systems in order to comply with these new rules.