No matter if you are a small, medium or a large business, by now you’ve heard the most important reportable item on your financial statement is about to change. What you should be asking yourself however is: are you ready for it?
In September 2016, the Financial Accounting Standards Board (FASB) warned companies that many will need to accelerate their preparation in order to be ready by the revenue standard’s effective date. The new standard replaces approximately 120 elements of industry-specific guidance in current U.S. GAAP with a more principles-driven approach to revenue recognition, and thus implementation may become an extensive project.
Published in May 2014 as FASB Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, with related additional ASUs subsequently providing guidance on narrower elements, the standards collectively are the result of more than a decade of debate about how businesses and groups should report revenue. The standards offer core principles to determine how and when to record revenue, unlike the rules-based guidance U.S.-based entities are accustomed to applying.
Why is revenue the most important measure?
All users of financial statements (including management, shareholders, lenders, analysts, investors, and regulators) look to revenue as a performance and health measure of a company. Because revenue is reported as a cumulative amount of a certain period of time, trends and comparisons are analyzed as well as revenue being an important input in key financial ratios. Revenue can be the attraction or diversion to a company’s ability to attract investors, borrow money, calculate compensation and benefits, and even in tax planning.
Check back with us as we provide a series of updates and guidance to help you prepare now and in the future.
This is the first in a series of publications designed to provide assistance with implementing and understanding FASB’s new standard on revenue recognition. We are excited to give you a more in-depth view into how the changes will impact the measurement and disclosure of what is considered the most important measure of a company’s performance. Over the following months, we hope you will follow along and join us in looking at this new standard. We will provide you with what you need to know to determine the best strategies for successful adoption of the standard, as well as a practical approach to updating your policies and procedures to achieve convergence.