The new revenue recognition standards
The new revenue recognition standards, IFRS 15 and ASC 606, aim to create a consistent, comprehensive framework for recognizing revenue across industries. Compliance with these standards is crucial for accurate financial reporting, transparency, and maintaining stakeholder trust. This guide will help you navigate the changes and ensure compliance.
Key Principles of the New Standards
The five-step model for revenue recognition under IFRS 15 and ASC 606 is as follows:
1. Identify the Contract with a Customer
– A contract is an agreement between two or more parties that creates enforceable rights and obligations. Contracts can be written, oral, or implied by customary business practices.
2. Identify the Performance Obligations in the Contract
– Performance obligations are promises in a contract to transfer distinct goods or services to the customer. A performance obligation is distinct if the customer can benefit from it on its own or together with other resources that are readily available.
3. Determine the Transaction Price
– The transaction price is the amount of consideration to which an entity expects to be end in exchange for transferring promised goods or services. This may include fixed amounts, variable amounts, or both.
4. Allocate the Transaction Price to the Performance Obligations
– Allocate the transaction price to each performance obligation based on the relative standalone selling prices. Standalone selling prices are the prices at which an entity would sell a promised good or service separately to a customer.
5. Recognize Revenue When (or as) the Entity Satisfies a Performance Obligation
– Recognize revenue when control of the good or service is transferred to the customer. Control can be transferred over time or at a point in time, depending on the nature of the performance obligation.
Preparing for Compliance
1. Understand the Standards
– Ensure a comprehensive understanding of IFRS 15 and ASC 606. Familiarize yourself with the detailed guidelines and principles.
2. Conduct an Impact Assessment
– Review all existing contracts and revenue streams to assess the impact of the new standards.
– Identify changes in the timing and amount of revenue recognized and document these changes.
3. Update Accounting Policies and Procedures
– Revise your accounting policies to align with the new standards.
– Clearly document procedures for identifying performance obligations, determining transaction prices, and recognizing revenue.
4. Train Your Team
– Provide comprehensive training for accounting, finance, sales, and legal teams.
– Ensure all relevant personnel understand the new standards and their roles in compliance.
5. Review and Revise Contracts
– Examine customer contracts to ensure they comply with the new standards.
– Work with legal advisors to update contract terms and conditions as needed.
6. Leverage Technology
– Implement or upgrade accounting software to support the new revenue recognition rules.
– Use automation to streamline the revenue recognition process and reduce the risk of errors.
7. Enhance Internal Controls
– Strengthen internal controls to support compliance with the new standards.
– Conduct regular internal audits to verify that revenue recognition practices are effective and compliant.
8. Communicate with Stakeholders
– Keep stakeholders informed about changes in revenue recognition practices and their impact.
– Provide clear, transparent explanations and regular updates.
Best Practices for Compliance
1. Regular Updates and Training
– Stay informed about any changes or updates to revenue recognition standards.
– Provide ongoing training and resources to ensure your team remains knowledgeable and compliant.
2. Clear Documentation
– Maintain thorough documentation of how your company complies with the standards.
– Document the rationale behind key decisions and the methods used to recognize revenue.
3. Consistent Application
– Apply updated accounting policies consistently across the organization.
– Regularly review and update procedures to ensure ongoing compliance.
4. Stakeholder Engagement
– Engage with stakeholders to address any concerns or questions about revenue recognition practices.
– Provide detailed disclosures and maintain transparent communication.
5. Seek Expert Guidance
– Consult with external auditors or accounting experts for guidance on complex issues.
– Seek professional advice to ensure full compliance with the standards.
Navigating the changes in revenue recognition standards requires a comprehensive approach involving updated policies, thorough training, enhanced systems, and transparent communication. By understanding and implementing these principles and best practices, your organization can achieve accurate financial reporting, maintain compliance, and build trust with stakeholders.
