• COVID-19
  • Insights
  • Who We Help
    •   Industrial Automation
    •   Manufacturing & Distribution
    •   A&E Professional Services
    •   International Businesses
      • ◦   Expanding Outside the U.S.
      • ◦   Expanding to the U.S.
  • Services
    •   COVID-19
      • ◦   Cash Flow Confidence Assessment
      • ◦   Maximize Your Loan Forgiveness
      • ◦   5 Key Focus Areas
      • ◦   COVID-19 Resource Center
    •   Client Accounting
      • ◦   Software Solutions
      • ◦   Accounting Support
      • ◦   Reporting
    •   Tax
      • ◦   R&D Tax Credit
      • ◦   Tax Credits & Incentives
      • ◦   Tax Structure
      • ◦   Federal Tax
      • ◦   State & Local Tax
      • ◦   Personal Tax
      • ◦   Other Tax Filings
    •   Advisory & Assurance
      • ◦   Assurance Levels
      • ◦   Reporting
      • ◦   Employee Benefit Plan Audits
      • ◦   Technical Accounting & Reporting
    •   Consulting
      • ◦   Data Analytics
      • ◦   Transaction Services
      • ◦   Business Planning
      • ◦   Succession & Exit Strategies
    •   International
      • ◦   International Tax
      • ◦   Foreign Direct Investment
      • ◦   Global Expansion
      • ◦   International Accounting
  • Events
  • Careers
    •   Why C&M
    •   Students
      • ◦   Campus Events
      • ◦   Internships
      • ◦   Reach Beyond Program
    •   Experienced Professionals
      • ◦   Team member profile videos
    •   Opportunities
    •   Employee Journals
    •   Office Tour
  • About Us
    •   How We Help
      • ◦   Service Approach
      • ◦   Affiliations
      • ◦   Communications & Technology
    •   Meet Our Team
    •   Testimonials
    •   Our Videos
    •   Our Story
  • Contact Us
  • Subscribe
CHANGE COUNTRY:
  • United States
  • 中国
  • Client Login
Clayton & McKervey Logo
  • COVID-19
  • Insights
  • Who We Help
  • Services
  • Events
  • Careers
  • About Us
  • Contact Us
  • Subscribe
    • Most Recent Insights
  1. Home
  2. Insights
  3. Revenue Recognition: Accounting Changes… You Have Options!

Revenue Recognition: Accounting Changes… You Have Options!

Posted by Julie Killian on May 16, 2017

Julie Killian Julie Killian

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.

Our team is always ready to help.

Please contact us for more information.

Julie Killian

Julie Killian

Shareholder, Advisory & Assurance

Contact Julie   |   Read Julie's bio

related news

How to Calculate R&D Tax Credits

As we’ve seen in the first two installments of this series, business owners often miss out on the R&D tax credit opportunity and the bottom-line infusion it can provide. Many…

Read full story

Doing Business in Mexico: What to Expect this Year

Without a doubt, this year will be interesting for Mexico. To start, it’s an election year and we all know what that means…a lot of uncertainty. As the global pandemic…

Read full story

What Expenses Qualify for R&D Tax Credits?

The R&D tax credit is one of the most overlooked opportunities to boost your bottom line. Many business owners fail to claim it under the mistaken belief that they’re not…

Read full story

Clayton & McKervey Launches The Sound of Automation Podcast

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—February 17, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is excited…

Read full story

Misconceptions About the Research & Experimentation Tax Credit

As companies put more emphasis on Industry 4.0 and business processes become more automated and accessible, the opportunities for Research & Experimentation tax credits increase. The Research and Experimentation (R&E)…

Read full story

Categories

Jump directly to the topics that matter to you most.

  • A&E Professional Services
  • About Us
  • Advisory & Assurance
  • Business Owners
  • C&M Press Releases
  • Careers
  • China Consulting
  • Clayton & McKervey
  • Client Accounting Services
  • Consulting
  • COVID-19
  • Data Analytics
  • Estate Planning
  • Expanding Outside the U.S.
  • Expanding to the U.S.
  • From the President
  • Industrial Automation
  • International
  • Manufacturing & Distribution
  • Mexico Consulting
  • Podcasts
  • Private Client Services
  • Tax & Tax Credits
  • Transaction Services
  • Videos

Authors

Read news direct from our managers and stakeholders.

    • Ben Smith
    • Beth Butchart
    • Bryan Powrozek
    • Carlos Calderon
    • Casey Haggerty
    • Clayton & McKervey
    • Dave Van Damme
    • Denise Asker
    • Eric Lin
    • Jim Biehl
    • Julie Killian
    • Kevin Johns
    • Margaret Amsden
    • Miroslav Georgiev
    • Nina Wang
    • Rob Dutkiewicz
    • Ruben Ramirez
    • Sarah Russell
    • Sue Tuson
    • Tarah Ablett
    • Teresa Gordon
    • Tim Finerty
    • Tim Hilligoss
    • Wendy Reedy

Additional Resources

Additional news from Clayton & McKervey can be found below.

  • Subscribe to our email newsletter
  • View upcoming events
  • Contact us to let us know how we can help you
  • Main Content
  • Related Insights

Revenue Recognition: Accounting Changes… You Have Options!

Posted by Julie Killian on May 16, 2017

Julie Killian

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.

Our team is always ready to help.

Please contact us for more information.

Julie Killian

Shareholder, Advisory & Assurance

Contact Julie   |   Read Julie's bio

related news

How to Calculate R&D Tax Credits

As we’ve seen in the first two installments of this series, business owners often miss out on the R&D tax credit opportunity and the bottom-line infusion it can provide. Many…

Read full story

Doing Business in Mexico: What to Expect this Year

Without a doubt, this year will be interesting for Mexico. To start, it’s an election year and we all know what that means…a lot of uncertainty. As the global pandemic…

Read full story

What Expenses Qualify for R&D Tax Credits?

The R&D tax credit is one of the most overlooked opportunities to boost your bottom line. Many business owners fail to claim it under the mistaken belief that they’re not…

Read full story

Clayton & McKervey Launches The Sound of Automation Podcast

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—February 17, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is excited…

Read full story

Misconceptions About the Research & Experimentation Tax Credit

As companies put more emphasis on Industry 4.0 and business processes become more automated and accessible, the opportunities for Research & Experimentation tax credits increase. The Research and Experimentation (R&E)…

Read full story

Categories

Jump directly to the topics that matter to you most.

  • A&E Professional Services
  • About Us
  • Advisory & Assurance
  • Business Owners
  • C&M Press Releases
  • Careers
  • China Consulting
  • Clayton & McKervey
  • Client Accounting Services
  • Consulting
  • COVID-19
  • Data Analytics
  • Estate Planning
  • Expanding Outside the U.S.
  • Expanding to the U.S.
  • From the President
  • Industrial Automation
  • International
  • Manufacturing & Distribution
  • Mexico Consulting
  • Podcasts
  • Private Client Services
  • Tax & Tax Credits
  • Transaction Services
  • Videos

Authors

Read news direct from our managers and stakeholders.

  • Ben Smith
  • Beth Butchart
  • Bryan Powrozek
  • Carlos Calderon
  • Casey Haggerty
  • Clayton & McKervey
  • Dave Van Damme
  • Denise Asker
  • Eric Lin
  • Jim Biehl
  • Julie Killian
  • Kevin Johns
  • Margaret Amsden
  • Miroslav Georgiev
  • Nina Wang
  • Rob Dutkiewicz
  • Ruben Ramirez
  • Sarah Russell
  • Sue Tuson
  • Tarah Ablett
  • Teresa Gordon
  • Tim Finerty
  • Tim Hilligoss
  • Wendy Reedy

Additional Resources

Additional news from Clayton & McKervey can be found below.

  • Subscribe to our email newsletter
  • View upcoming events
  • Contact us to let us know how we can help you

Website

  • COVID-19
  • Insights
  • Who We Help
  • Services
  • Events
  • Careers
  • About Us
  • Contact Us
  • Subscribe

Location

+1 248.208.8860
2000 Town Center
Suite 1800
Southfield, MI
48075 | USA

Connect

  • Events
  • Newsletter
  • Client Login

Social

  • LinkedIn
  • Facebook
  • Twitter
  • Glassdoor
  • YouTube
  • Instagram

Awards

DFP Top Work Places Best & Brightest
Prime Global

Tax | Accounting | Assurance | Consulting | Highly technical and accessible team of CPAs helping growth driven, closely held, middle market companies compete in the global marketplace. Michigan-based accountants and advisors focused on helping business owners in the United States and throughout Europe and China.

Privacy Policy Disclaimer

© 2021 Clayton & McKervey