Accounting and tax preparation can seem very overwhelming if you are not properly prepared. Auditors are evaluating their private business clients to ensure they are properly prepared for filing revenue statements that comply with the new revenue recognition standards. These changes will take effect in the early part of 2020.
Why is this important to your business?
- It removes any inconsistencies in existing revenue requirements
- Improves comparison factors for businesses across industries, jurisdictions, markets and private entities.
- Improves disclosure requirements related to financial statements and their users.
- Makes the preparation of financial statements significantly easier by reducing the requirements to which various organizations must refer to.
These standards were adopted by the FASB to fall in line with the Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). Now businesses are hurrying to ensure these changes take place before the set deadline.
Public businesses have already been complying with these standards, which began in the first quarter of 2018. With these changes already in effect, the focus is now being placed on private business owners. There are some circumstances where these changes may not affect the way a company reports revenue. Some may not have to incorporate a large change to their income statements, but they will still have to comply with the extra requirements for footnote disclosures.
In addition, these changes will raise the number of required documents that are utilized by client management.
Here are some pointers to help auditors know if their clients are ready for these new standards.
- Ensure they understand the changes to current GAAP based on FASBASU No. 2014-09, Revenue from Contracts with Customers
- Determine how your company will adopt the new guidance
- Educate users about the changes they can expect in your company’s financial statements
Evaluate if the client is ready to adapt the new standards
First you will want to meet with management and help them understand and embrace the new changes that are being implemented. This is the perfect opportunity for your client to evaluate their business and their direct interaction with customers, as well as review terms and conditions that are in contracts.
Ensure that your client is prepared to comply with FASB ASC Topic 606’s five-step process
This five-step process should help business owners look at all areas of their business. They will be forced to understand who their customers are, as well as evaluate contracts and define what is clearly promised to the customer. From there, the price is to be determined and assigned according to performance obligations. The business can then decide when the revenue should be recognized.
- Identify contract with customer
- Identify obligations defined in the contract
- Determine price
- Assign price to performance obligations
- Determine when revenue should be recognized
Review new standard documentation requirements with your client
Small companies do not have large numbers of staff, so these types of changes can become very frustrating. Some may not even have an in-house accounting department, which means they lack the resources to do the research that is needed. These standards will require more documentation, which means time spent by management to produce these documents will take away from the everyday operations of a business.
Check over all financial statements
While there may be no change numerically to these statements, it will be important for the business to understand the new note disclosures that need to be included on revenue statements. It will take some time to prepare these disclosures and grasp a full understanding of them.
Small businesses will turn to their auditor during accounting and tax preparation periods, but they also lean on these professionals during large changes such as these. Ensure this transition is smooth for your private company clients.
Parker Business Consulting & Accounting, P.C. is a unique firm with more than a combined 75 years of experience in private industry, coupled with a strong background in public accounting. This combination enables us to provide valuable assistance based on direct experience with many of the same issues faced by our clients.