Two Sets of Books for Revenue Recognition

06.02.2018 | Published By:

Ellen Wood, Austin

You Will Have to Keep Two Sets of Books if Impacted by the New Revenue Recognition Standard.

It is not too soon to be evaluating the impact of ASC 606 on their financial reporting and other aspects of their business. It is recommended that businesses undertake and impact assessment and develop an implementation plan and budget.  Allowance should be made for additional resources that will be required to meet the disclosure requirements including the requirement to keep “two sets of books” in the initial reporting period. The new standard provides a choice of two methods of adoption as follows: 

Implementation Methods

 

Option 1:  Full Retrospective

  • Entities restate all prior periods presented in the financial statements as though the new standard had always been in effect.
  • Entities would not restate completed contracts that began and ended in the same annual reporting period.
  • Contracts with variable consideration would be reported using the final transaction price.
  • Entity may reflect the aggregate effect of all modifications that occurred before the commencement of the earliest reporting period being presented.
  • Entities would not need to disclose the amount of transaction price allocated to remaining performance obligations for periods presented before the date of initial application.


Option 2:  Modified Retrospective

  • Entities must elect to apply the new standard to either all contracts or only those that aren’t completed as of the date of adoption. Compare how those contracts would have been recorded under Topic 606 with how they were actually recorded under legacy GAAP. The cumulative effect of any necessary adjustments would be recorded to opening retained earnings on the date of adoption – prior periods would not be restated. 
  • Entities must disclose the effect of adopting the new standard on each affected financial statement line item. The financial statements for the initial period of adoption will reflect the application of ASC 606 and the footnotes will disclose pro forma balances had legacy GAAP continued to be applied.
  • So entities will effectively be required to maintain two sets of books during the initial year of applying the new standard.

Whereas initial surveys of public entity intentions regarding the new standard indicated close to an even split over which method of adoption would be selected, it appears that when the rubber met the road minds were quickly changed in favor of the modified retroactive approach.  In most cases, the initial effort to obtain compliance will be less if the modified retrospective (or “cumulative effect”) method is selected.  This was borne out by a KPMG survey of public companies reporting their Q1 2018 results showed a whopping 91% of reporting entities had opted for the modified retrospective method.  Reasons for this include:

  1. The effort required to restate prior years was prohibitive.
  2. There was not enough time available to complete a full restatement of prior years financial statements.
  3. Necessary data may have been missing or hard to collate.
  4. The potential impacts on historical revenue patterns were calculated and deemed to be undesirable.

For entities materially impacted by the standard, considerable effort will likely be required whichever method is adopted.  Both methods require that two sets of books be prepared for one or more accounting periods.  If the full retrospective method is adopted, the records for prior periods will need to be restated under new GAAP.  If modified retrospective method is adopted, it is the current year for which every line item in the financials must be reported under both old and new GAAP.

The Bottom Line

 

Adoption of the new revenue recognition standard (Accounting Standards Update 2014-09; Topic 606) is mandatory for public companies with annual reporting periods commencing on/after December 15, 2017 (i.e. calendar year 2018).  Non-public entities are required to adopt the standard for annual reporting periods commencing on/after December 15, 2018 (i.e. calendar year 2018). vcfo can help get you navigate this process with an impact assessment and implementation plan to ensure your records are incompliance and to avoid headaches down the line. Connect with us today for your initial assessment. 

Categories: Finance, Finance Consulting, CFO Consulting

Tags: strategic planning,financial strategy,cfo consulting,financial consulting firms,operational advice,revenue recognition

Leave a Comment

Required fields marked with *
Please note: Your email will not be shared.
Read Our Commenting Policy