The deadline for implementation of ASU No. 2014‑09, Revenue from Contracts with Customers (Topic 606) has passed for public companies. Is your company, whether public or private, compliant with this new standard?
In the fall of 2017, we met with many of our clients and colleagues here in our Washington, D.C. office to deliver a live seminar, providing a complete overview of the principle-based, five-step model and a deeper dive into the anticipated accounting implementation issues specific to government contractors. If you were able to join us, we hope you found the session helpful. If you were not able to join us, please contact us. We would be happy to share a copy of the presentation with you.
The effective date of the new standard was Jan. 1, 2018, for calendar year publicly held companies and is Jan. 1, 2019, for calendar year privately held companies.
The new standard provides for two implementation methods:
1. Full retrospective application:
Recast of prior period financial statements (with an adjustment to opening retained earnings for the first year presented). For example, for a private company, 2018 would be recast to reflect the adoption of the new standard presented in the 2019 financial statements. The cumulative adjustment would be reflected as of Jan. 1, 2018.
2. Modified retrospective application:
Cumulative effect of initially applying the standard is recorded as an adjustment to opening retained earnings of the period of initial application.Under the same example, 2018 would not be recast in the 2019 financial statements. The cumulative adjustment would be reflected as of Jan. 1, 2019.
Steps for Implementation
Implementation of the new standard will require planning and collaboration, particularly among Accounting and Contracts personnel. Follow these steps to get started:
1. Designate the individual(s) responsible for overseeing implementation:
Do this soon! The individual responsible for implementation of the new standard should have a clear understanding of its main provisions, as well as a familiarity with key issues to look out for with respect to government contracts. If you still need training, be sure to consult with an outside professional to ensure you get up to speed on the provisions of the new standard and application of the five-step model to government contracts.
2. Educate your executive management, audit committee, board of directors, investors, etc. on the new standards:
You should consider presenting a high-level overview of your implementation plan to executive management and others, including the expected timing of when you will be prepared to brief them on the impact to your company’s accounts.
3. Evaluate how changes will impact how your company accounts for different types of revenue streams and contracts:
In working closely with publicly held companies, we have seen great success in using a phased approach to analyze contracts, accumulate revenue streams and, ultimately, to calculate the impact to the company’s accounts. A phased approach such as the following should be considered:
- Phase I (Scoping and Assessment):
Document revenue streams and accounting policies followed by your company under the existing accounting guidance, if these are not already documented. Review contracts as needed to identify and understand variations in contracts and to identify common contract attributes within each revenue stream. For example, you may identify revenue streams such as i) T&M contracts, ii) fixed-price contracts and iii) cost- plus contracts. Within cost-plus contracts, you may have cost-plus, fixed-fee or cost-plus, award-fee and will segregate the analysis of those contracts based on those attributes.Within fixed price contracts, you may have “straight-line” services-based contracts and/or “percentage-of-completion” type development/production contracts.
- Phase II (Technical Analysis):
Complete individual contract review and analysis under the five-step model and evaluate recognition under the new standard. This must be done for each contract, within each revenue stream. Proper attention to scoping in Phase I should facilitate a more efficient implementation by documenting and analyzing similar contracts at one time.
- Phase III (Business Systems Impact):
Evaluate current controls, policies and procedures, and document any changes required to facilitate revenue recognition under the new standard. Additionally, evaluate whether any accounting system change requirements will be necessary.
- Phase IV (Financial Reporting):
Using the analysis from Phase II, prepare a summary of the impact to accounts for 2018 and 2019, to facilitate recording adjustments and/or disclosure requirements.We expect that in instances where there is a material impact to the financial statements as a result of implementation, most companies will elect to use full retrospective application in order to present useful and transparent comparative information in the financial statements.
4. Determine implementation method:
Those responsible for implementation of the new standard should discuss the overall impact to accounts for 2018 (for comparative purposes) and to 2019 (year of implementation) with all major stakeholders (executive management, audit committee, board of directors, investors, etc.). Based on the materiality of the impact, and the qualitative feedback from stakeholders, you should select a method that is determined to be most efficient and transparent in your financial statements. Our expectation is that to the extent the adoption of the new standard does not have a material impact on the financial statements, some entities may wish to use the modified retrospective application. On the flip side, even when not material, some companies may elect to do a full retrospective application to avoid additional disclosures that are required when using the modified retrospective approach (i.e., disclosing impact to all prior periods at a disaggregated level).
We expect that in instances where there is a material impact to the financial statements as a result of implementation, most companies will elect to use full retrospective application in order to present useful and transparent comparative information in the financial statements.
Visit the A&D Task force website here.
Warren Averett is an independent member of the BDO Alliance USA. This article was borrowed with permission from BDO USA, LLP.