Hey, did you know a new set of standards for revenue recognition is coming down the pike?
We’re kidding. Of course you do.
We were curious if a certain type of company, specific industries, or even a company selling a certain kind of bundled product might see more benefits when the new guidance becomes the law of the land, at least in the short term. Is it possible to identify who’s revenue would increase the most when the new guidance hits?
If one considers all the information coming out on the incoming guidance, including two recently published accounting policy and practice portfolios from Bloomberg BNA analyzing the new standard, there is no simple answer. The impact will be significant across the board. Statements attributed to authors of the reports mentioned describe the new standard as having “no precedent.”
We posed these same queries to our friends, Ramon Sheffer, Director of Financial Reporting Advisory Services, and Jagruti Solanki, Audit Manager, of the Atlanta-based accounting firm, Habif, Arogeti & Wynne, LLP.
Here’s what they had to say:
In all honesty, determining for whom the new guidance would be better or worse, or more beneficial, comes down to an organization’s specific nature of revenue and the way it is recognized today. That fact applies across all industries, making it difficult to pinpoint the biggest industry-specific benefactors.
As an example, consider a company with a policy offering volume discounts. That firm would most likely pick up lower revenue during the latter part of the contract due to discounted rates under the existing standard. Under new guidance, that same company could use the weighted average method (expected outcome method) and recognize revenue at a weighted average price, as opposed to discounted rates. This would result in higher revenue being recognized during the latter part of the contract under the new standard in comparison to the existing standard.
Let’s also consider software companies with VSOE issues or contracts with a customer acceptance clause which, under current guidance, may have resulted in a revenue deferral. The new standard will help such an organization pick up revenue earlier.
Another big area of impact with the new guidance – independent of how revenue is or will be recognized – is the capitalizing cost of acquiring contracts.
The companies likely to see the most impact from the new revenue recognition guidance are those with the potential for multiple deliverables in bundled arrangements, which include entities in software, technology, entertainment, media and construction, when utilizing the completed contract method.
Entities with specific revenue types which could prove to be beneficial include:
1) Companies with a tier pricing revenue model
2) Companies which are commission driven, which could capitalize the sales commission for a more advantageous bottom line
3) Companies with implicit performance considerations/deliverables, such as discounts or upgrades which can’t be recognized under the existing standard
4) Companies with revenue contingent upon customer acceptance
5) Software companies unable to pick up revenue under current guidance due to VSOE issues, as referenced above