Your company’s revenue…when is it “yours”?
Sounds like a simple question, but when you apply the principles of “Revenue Recognition” accounting standards, that simplicity gets challenged. Why is this important? We explain:
Any company, especially one required to provide financial statements to a lender or investor, must “recognize” revenue in the proper period in its financial statements. There are various factors that determine the “recognition date” which can impact both your financial statement performance and your income tax liability.
The Financial Accounting Standards Board issued a standard on revenue recognition as an attempt to remove inconsistencies and weaknesses in existing revenue requirements and to improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.
This standard became effective for annual reporting periods beginning after December 15, 2018 (for the calendar year ended December 31, 2019) for privately held entities. For publicly traded entities, the standard became effective for annual reporting periods beginning after December 15, 2017.
Under this standard, entities should be evaluating their sales contracts and recognize revenue based on specific guidelines.
As a result, most companies in the U.S. have seen changes to existing processes and contracts, including modification to existing contracts with customers, fine-tuning compensation arrangements of sales departments and IT, in addition to seeing the impact on financial statements, loan covenants, and taxable income.
How are we helping our clients? We can review customer contracts and discuss with our clients the potential impact this standard has on financial statements, bank covenants, income tax liability, and more. We may also be able to work with you to modify contracts so that revenue is recognized as intended.
Contact us so we can help you be prepared.