How to Navigate Revenue Recognition

There’s been much discussion and anticipation surrounding Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, which drastically revises the way organizations address revenue. With many of the reporting changes taking effect for not-for-profit organizations in 2019, now is the time to start preparing if you haven’t already.

Organizations that haven’t started preparing for the changes have the pressure of approaching deadlines. On the upside, however, they can benefit from lessons learned by their peers who’ve already been through the process. Here are some of those key implementation insights and takeaways.

Create a Checklist of Each Revenue Stream

A number of common revenue streams recognized by not-for-profit organizations are scoped out of the standard. When taking an inventory of your organization’s revenue streams, you may be surprised by how many you can cross off your list. Some key revenue streams include contributions, rental income, and investment income.

Tackle the Simplest Contracts First

Topic 606 is over 950 pages long, so it’s easy to get lost in the details. The implementation process can be less daunting if your organization starts with contracts or revenue streams that aren’t too complex. This can help you learn how the standard is organized and where certain information is located while establishing a strong foundation of the concepts.

Review the Options

There are two methods for transitioning to the new standard: the full-retrospective method and the modified-retrospective method. It’s important to be aware of the differences and impacts to disclosures that could result from the conclusions reached through each method.

Review our Revenue Recognition Guide for insight on which method is a better fit for you.

Entertain New Ways of Thinking

Revenue recognition can work to your benefit if you view it as an opportunity to critically reflect on your contracts and evaluate which goods or services your organization provides. Many organizations, once having evaluated their agreements, find the methodology provides a more consistent approach for defining revenue.

Example

When higher-education institutions evaluate tuition income, it can be challenging for leadership to move past the multiple components within tuition that could result in recognition of revenue at different times.

This is because deposits might not be refundable until specific dates—at which point performance obligations have already been met and revenue separately recognized from the remainder of tuition. Drop and withdrawal dates may also initially give the appearance that the institution has met all performance obligations. Despite this appearance, revenue may still need to be subsequently deferred because the organization is obligated to provide additional instructions to students beyond drop and withdrawal dates.

Cross-Check Conclusions 

Contracts aren’t always cut and dried, and there’s potential for misinterpretation. For example, step two of the standard requires organizations to identify specific performance obligations. Individuals in an organization may have different interpretations of what qualifies as an obligation, so it’s useful to gain broad input before defining how the standard is applied.

When calculating potential discounts to the transaction price, concessions and rights of return need to be fully vetted to establish a basis for how much revenue is recognizable under the contract. This may require reaching out to others within operations for a clearer picture of the market and an understanding of which discounts and concessions are being applied on a routine basis.

If certain statistical reports are used to drive this analysis, it’s critical the data is complete and accurate. It’s also important that individuals within the organization aren’t able to edit the data incorrectly and that they know the intended use of the information.

Communicate Conclusions

The sooner your board, or those charged with governance, are educated on changes introduced in Topic 606, the more time you’ll have to prepare for potential changes to operating results and disclosures.

No matter where you are in your implementation process, procedures and conclusions should be documented as clearly as possible. There will continue to be modifications to existing contracts throughout your documentation process, and having references to specific sections and paragraphs within a contract will make it easier to update conclusions when language in the contract changes.

We’re Here to Help

The rules in Topic 606 are complex and guidance is regularly released. However, more than 15 industry task forces have been assembled by the American Institute of Certified Public Accountants (AICPA) to develop interpretations of the rules and practical guidance to help organizations navigate their unique circumstances.

If you have questions about revenue recognition or would like assistance with the implementation process, please contact your Moss Adams professional.