The sweeping new revenue recognition standard goes into effect soon. But many companies are behind on implementing it. Whether your company is public or private, you can’t afford to delay the implementation process any longer.
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, requires companies following U.S. Generally Accepted Accounting Principles (GAAP) to use a principles-based approach for recognizing revenues from long-term contracts. Under the new guidance, companies must follow five steps when deciding how and when to recognize revenues:
1. Identify a contract with a customer.
2. Separate the contract’s commitments.
3. Determine the transaction price.
4. Allocate a price to each promise.
5. Recognize revenue when or as the company transfers the promised good or service to the customer, depending on the type of contract.
In some cases, the new guidance will result in earlier revenue recognition than in current practice. This is because the new standard will require companies to estimate the effects of sales incentives, discounts and warranties.
The new standard goes into effect for public companies next year. Private companies have a one-year reprieve.
The breadth of change that will be experienced from the new standard depends on the industry. Companies that currently follow specific industry-based guidance, such as software, real estate, asset management and wireless carrier companies, will feel the biggest changes. Nearly all companies will be affected by the expanded disclosure requirements.
Some companies that have already started the implementation process have found that it’s more challenging than they initially expected, especially if the company issues comparative statements. Reporting comparative results in accordance with the new standard requires a two-year head start to ensure all of the relevant data is accurately collected.
Reasons for procrastination
Why are so many companies dragging their feet? Reasons may include:
Lack of funding or staff,
Challenges interpreting the standard’s technical requirements, and
Difficulty collecting data.
Many companies remain uncertain how to prepare their accounting systems and recordkeeping to accommodate the changes, even though the FASB has issued several amendments to help clarify the guidance. In addition, the AICPA’s FinREC has published industry-specific interpretive guidance to address specific implementation issues related to the revenue recognition standard.
We’ve already helped other companies start the implementation process — and we’re ready to help get you up to speed, too. Contact us for questions on how the new revenue recognition standard will impact your financial statements and accounting systems.
Think the rules for reporting employee stock options and restricted stock are too complicated? The Financial Accounting Standards Board (FASB) agrees — and it has simplified the rules starting in 2017 for public companies and 2018 for private companies. Here’s how.
Under current U.S. Generally Accepted Accounting Principles (GAAP), for each share-based payment, employers must determine whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results in either an excess tax benefit or a tax deficiency.
Currently, when the deduction for a share-based payment for income tax purposes exceeds the compensation cost for accounting purposes, the employer recognizes an excess tax benefit in additional paid-in capital, which is an equity account on the balance sheet. Conversely, tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. Excess tax benefits aren’t recognized until the deduction reduces taxes payable.
Accounting Standards Update (ASU) No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, moves all accounting for income tax consequences of share-based payments to the income statement. Under the simplified rules:
All excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit,
The tax effects of exercised or vested awards will be treated as discrete items in the reporting Employers will recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.
The new standard also calls for excess tax benefits to be classified on the statement of cash flows as an operating activity with other income tax cash flows. Under current GAAP, employers are required to separate excess tax benefits from other income tax cash flows and classify them as financing activities.
Alternative for private companies
Many people forget that private companies also may award stock options and restricted shares to employees. However, it’s more challenging to value share-based awards for private companies, because their shares don’t trade in the public markets.
The updated guidance provides a simplified formula for estimating the expected term for nonpublic entities that issue share-based payments based on a service or performance condition. Under this optional practical expedient, the expected term of a share-based payment will generally be the midpoint between the requisite service period and the contractual term of the award, if vesting is dependent only on a service condition. That formula also applies if the award is dependent on satisfying a performance condition that’s probable of being achieved.
Right for you?
Share-based payments can be an effective way for cash-strapped businesses to attract and retain executives. But the existing accounting rules have discouraged some companies from trying out employee stock options and restricted stock in their compensation plans. With simplification efforts in effect, it’s easier than ever to report these transactions. Contact us to discuss whether share-based payments could work for your company.