Will you be impacted by the new revenue recognition rules?

There are new revenue recognition rules that manufacturers will be facing in the near future: ASC 606 and IFRS 15. There are a number of ways in which you, as a manufacturer, may be impacted.

Who Is Impacted?

Manufacturers with the following characteristics are more likely to be impacted:

  • Food & Beverage / Consumer Packaged Goods: Sales promotions/variable pricing
  • Automotive: Retroactive price changes, long term contracts  
  • Life Sciences: High value equipment with required after sales service  
  • Project related businesses

A Closer Look At The New Revenue Recognition Rules

The core principle is that revenue should be recognized in an amount and time period that is aligned with the expectation of the actual amount to be earned and when it is earned (i.e. goods or services are delivered). To achieve this core principle, an entity should apply the following steps:

Revenue Recognition Rules ProcessThe new standard requires more extensive disclosures in the financial statements, even if the new rules mean for some companies that there is no real change to the process of determining revenue recognition or the results themselves. The specifics of the steps include:

  • Identify the contract(s) with a customer —  There may be cases where what is delivered against two or more orders may be considered as part of a single contract for revenue recognition purposes.
  • Identify the performance obligations in the contract — It could be the case that several order lines are considered to be part of the same performance obligation, where they are not considered to be distinct promises to transfer goods or services.
  • Determine the transaction price — Revenue must be allocated to performance obligations on the basis of standalone selling prices, and revenue must be determined net of variable consideration.
  • Allocate the transaction price to the performance obligations in the contract — There is a need for qualified accounting staff to be involved in applying judgment from the inception of contracts and through all stages of delivery against such contracts to define, estimate and record the elements required to properly determine the revenue recognition for that contract.
  • Recognize revenue when (or as) the entity satisfies a performance obligation — The new standard could mean that, in some cases, revenue has to be recognized earlier than under previous standards which would have required that revenue was only recognized at the end of the process when all of the economic risk had transferred to the customer. In other cases, revenue recognition could be later than under previous standards, if all the criteria in the new standards are not met.

Why Are Revenue Recognition Rules Changing?

U.S. GAAP guidelines contained both broad concepts and specific requirements by industry or transaction type which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited guidance making application difficult in complex transactions and for multiple element arrangements. To address these issues, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for the U.S.  

Stay On Top Of The Changes

Learn more about the current situation of revenue recognition, these new rules and how you can be prepared for the change by reading the white paper, Revenue Recognition: ASC 606 & IFRS 15 From A Manufacturer’s Perspective.

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