What private companies should know about the new revenue recognition standard
This Heads Up provides a high-level overview of the new five-step model for recognizing revenue under ASC 606 and discusses the standard's mandatory effective date for private companies. It also outlines the practical expedients available to private companies with respect to certain of the new standard's disclosure requirements and discusses internal control considerations. In addition, the Heads Up provides some observations and lessons learned from the implementation of ASC 606 by public companies.
In May 2014, the FASB issued its final standard on revenue from contracts with customers, ASU 2014-09 (codified in ASC 606). Since then, the Board has issued a number of additional ASUs to amend and clarify the guidance in ASC 606, ASC 610-20, and ASC 340-40. The new standard replaces almost all current revenue guidance, including industry-specific requirements, and every company is likely to be affected by it. For private companies, the rules take effect for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019.
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As used in this Heads Up, a “private company” is an entity that is not any of the following:
A public business entity (as defined in the ASC master glossary).
A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted in an exchange or an over-thecounter market.
An employee benefit plan that files or furnishes financial statements with or to the SEC.
In response to concerns from commenters regarding costs and complexities that may overburden private companies, the FASB considered the needs of users of such companies’ financial statements throughout the new revenue standard’s development. The Board ultimately concluded that while no specific changes to the recognition and measurement guidance were necessary for private companies, it would be appropriate to modify the required disclosure package and mandatory effective date for such companies. Accordingly, the standard permits private companies to elect not to provide certain of the quantitative and qualitative disclosures required for public companies.
This Heads Up provides a high-level overview of the new five-step model for recognizing revenue under ASC 606 and discusses the standard’s mandatory effective date for private companies. It also outlines the practical expedients available to private companies with respect to certain of the new standard’s disclosure requirements (see Appendix A for a comprehensive summary) and discusses internal control considerations. In addition, the Heads Up provides some observations and lessons learned from the implementation of ASC 606 by
Effective Date for Private Companies
As discussed above, for private companies, the new revenue standard is effective for annualreporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Private companies may elect to early adopt the new guidance as of the standard’s original effective date for public companies (i.e., annual reporting periods beginning after December 15, 2016). If private companies elect to early adopt the standard, they have the option to either (1) adopt it beginning with interim periods within the first annual reporting period or (2) wait to present interim periods under the new standard until the following annual reporting period.
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Effective-date relief to private companies is typically described as a one-year delay. However, the delay is likely to be even greater than one year because of the different adoption requirements for interim periods.
Public companies must adopt the new revenue standard for annual periods beginning after December 15, 2017 (one year earlier than private companies). However, public companies are also required to adopt the new guidance for interim periods within those annual periods. Therefore, a calendar-year-end public company will apply the new revenue standard when presenting its results for the first quarter of 2018 (i.e., the period ending March 31, 2018), which the company is likely to issue in April 2018.
By contrast, private companies are not required to adopt the new revenue standard until they report their annual results. For example, a calendar-year-end private company would typically produce the results of its year ended December 31, 2019, in March or April 2020. In addition, if a private company’s financial statements for an interim period are required or are otherwise produced, the private company is not required to adopt the new revenue standard for that interim period if such period occurred in the year ended December 31, 2019. However, given that the annual results will be reported on a new basis (i.e., under ASC 606), a private company may find it beneficial to early adopt the standard for interim periods since the company would otherwise be required to revise the accounting for its revenue transactions as presented in its interim financial statements when including full-year results in its year-end reporting.
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Heads Up newsletters, published as warranted, analyze important accounting developments, such as new FASB and IASB pronouncements or exposure drafts. Concise examples and answers to frequently asked questions assist readers in understanding and implementing the critical guidance.