Reminder for contractors
At long last and after several years of discussion regarding the new GAAP revenue recognition standard, we have entered the period of implementation for most private companies.
The standard is effective for the calendar year 2019 and for fiscal years that begin within 2019, so now is the time to make any changes that haven’t already been implemented. As we’ve been communicating over the past few years, even though many contractors won’t see widespread changes to their revenue recognition process under the new standard, it is important to understand its provisions and nuances, since there is whole new accounting language to be used going forward.
Reminder #1 – Contracts, Contracts, Contracts
The new revenue recognition standard is very contract focused. In general, the revenue recognition process is dictated by the terms of the contracts between the contractor and its customers. The terms are required to be analyzed on a contract-by-contract basis to determine how and when to recognize revenue. While this places an emphasis on making sure that contract terms are well-defined and agreed to in writing with customers, it also provides the flexibility to draft contract terms to help achieve desired revenue recognition results, when such flexibility is available.
Reminder #2 – Transition Method
The standard allows an entity to select between two transition methods: 1) a fully retrospective approach for all prior periods presented in the period of adoption, or 2) a modified retrospective approach with a cumulative effect adjustment as of the date of initial application. The second method is the most common approach used by companies. It requires a company to determine the impact on the balance sheet of the change in revenue recognition accounting principle as of the date of the beginning of the company’s fiscal year starting in 2019. This impact is recorded as a one-time line item adjustment to equity within a company’s statement of equity or retained earnings, net of any tax effects.