Client Accounting Services

Revenue Recognition: Accounting Changes… You Have Options!

Posted on May 16, 2017 by

Dave Van Damme

Dave Van Damme

Share This

By now companies know that big changes are coming to their US Generally Accepted Accounting Principles (GAAP) financial statements. Now is the time for management to consider options related to their accounting guidance transition plan. There is more than one choice, as outlined below.

As a reminder, the principles-based model for revenue recognition goes into effect for non-public companies with annual reporting periods beginning after December 15, 2018. One year later, non-public companies have to implement the new lease guidance, which goes into effect with annual reporting periods beginning after December 15, 2019.

For companies hesitant about the impact these changes will have on their financial statements, there is another option. The Financial Reporting Framework for Small and Medium Sized Entities (FRF for SMEs) is a special purpose framework based on the principles of GAAP, but tailored to meet the needs of privately held businesses and their financial statement users. This framework follows traditional GAAP accounting for revenue transactions and leases.

Companies should consider the upcoming changes, and determine whether management and other financial statement users would benefit from implementing the new requirements. Alternatively, switching to the FRF for SME reporting framework allows companies to maintain consistent financial statements, and avoid the extensive transition requirements embedded in the new guidance.

Transition Considerations

Revenue Guidance

The degree of impact depends on the company’s industry and the nature of revenue transactions. Companies with the following types of contract characteristics will be more heavily impacted by the change:

  • Complex contracts with numerous variables or terms and conditions
  • Contracts with multiple revenue streams, such as a contract providing tooling and production parts
  • Contracts that are not well documented; resulting in data which will be difficult to accumulate
  • Contracts with variable consideration
  • Contracts containing significant costs in order to obtain the contracts, such as sales commissions
  • Contracts providing a customer with the right of return, or which have customer acceptance provisions
  • Contracts with customer warranties

Each customer contract must be evaluated separately in the context of the new standard, without regard to how revenue was recognized for that contract in the past.

Lease Guidance

The new leasing model will affect almost all entities with either operating or capital leases. Whereas only capital leases were previously recorded on a company’s balance sheet, now both types of leases will be recorded in the form of a right-of-use asset and lease liability.

To implement the guidance, management will first need to gather data about all outstanding and potential leasing arrangements with durations of 12 months or longer. Each lease must be evaluated separately in the context of the new standard to determine if the lease meets the requirements of an operating or finance lease.

Because of the additional assets and liabilities to be recorded on the balance sheet when the new standard is implemented, there may be significant impacts on many of the financial metrics provided to management, owners, and third parties (i.e., debt covenants).

FRF for SMEs

When reviewing the effects of the new revenue and leasing standards, management may determine that the financial statement users would be negatively impacted by the required updates, or that the cost of implementing the changes far exceeds the benefit. If either is the case, companies should take a closer look at the FRF for SMEs framework as a reporting alternative.

While FRF for SMEs is not GAAP, there are minimal differences between the two frameworks for everyday accounting issues. Also, keep in mind that although these are different reporting options, the level of assurance of an audit or review stays the same no matter which reporting option is used. For clarity, if a company obtained an audit for an FRF for SMEs financial statement, the relevant auditing procedures and opinion would provide the same assurance as a GAAP financial statement audit.

In addition to maintaining traditional GAAP accounting related to revenue transactions and operating and capital leases, FRF for SMEs follows traditional GAAP for most transactions that affect privately held companies.

Key Differences Between FRF for SMEs and GAAP

US GAAP FRF for SMEs
Variable Interest Entities (VIEs) All related party relationships must be analyzed and primary beneficiaries must consolidate all VIEs. No concept of VIEs. No analysis of consolidation required.
Derivatives Measured at fair value. Not recognized until settled (carried at historical cost). footnote disclosure of objective, contract amount, and net settlement amount at financial statement date.
Goodwill No amortization of goodwill. Trigger based impairment testing. Goodwill is amortized over the tax life, or 15 years. No impairment testing requirement.
Income Tax Reporting Deferred tax method required. Uncertain tax positions (UTPs) must be analyzed. Option to account for taxes under either the deferred tax methods (US GAAP) or the income taxes payable method. No concept of UTPs.

For private companies, FRF for SMEs isn’t an inferior reporting framework. On the contrary, it is designed to specifically meet the needs of private companies and their financial statement users. To determine which accounting framework is best, contact the professionals at Clayton & McKervey. We are always ready to help.

Dave Van Damme

Shareholder

Dave leads the advisory & assurance practice and is well known inside and outside the firm for being both engaged & positive.

Related Insights

Digital Advisory Services

Using Standardization for Anything-But-Standard Results

Posted on June 29, 2022 by

Elly Mioduszewski
Running your business is hard, but how it’s run can be made easier. Implementing standardized work processes can provide you and your team with more time to look at results so you can determine where to go next—rather than spending unnecessary time capturing and correcting routine activity. 

Tax & Assurance Guidance

Understanding Your Cash Flow is Important-Here’s Why

Posted on June 24, 2022 by

Dave Van Damme
Managing cash flow in a business should go far beyond ensuring that you have funds available to pay your current bills. While that’s a threshold every new business should meet, developing deeper cash flow management skills is necessary to scale your business and prevent unnecessary stress. 

International Businesses

Teresa Gordon Selected for Select USA Mentorship Program 

Posted on June 24, 2022 by

Clayton & Mckervey
C&M Shareholder Teresa Gordon will be participating in SelectUSA’s Select Global Women in Tech (SGWIT) Mentorship Network.

Sign up for our newsletters

Get business and industry-specific news and knowledge straight from our consultants and accounting specialists.

The Sound of Automation Podcast

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Insights & Perspectives

Using Standardization for Anything-But-Standard Results

Running your business is hard, but how it’s run can be made easier. Implementing standardized work processes can provide you and your team with more time to look at results so you can determine where to go next—rather than spending unnecessary time capturing and correcting routine activity. 

Read More

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Skip to content