Revenue Recognition – Real Life Impacts
Accounting for revenues and the associated direct costs has caused global sweeping changes recently. While the underlying concepts are not entirely new, the changes are having larger impacts on certain industries and are causing other companies to rethink how they do business.
U.S. public companies with a calendar year end are using the new standard in 2018, while private companies get an extra year for transition. This makes it difficult to directly compare companies for investing and financing decisions. However, the following are a few observed impacts of the new revenue recognition model:
- Companies operating under a license plus long-term customer maintenance fee model will see drastic changes in the allocation and timing of revenue, often accelerating revenue recognition on the license portion of the contract.
- Companies offering loyalty programs or “free stuff” as customer incentives may have treated the associated costs as marketing expense in the past, but are now required to defer top-line revenues associated with these performance obligations going forward.
- Companies paying sales commissions may have expensed these costs when paid in the past, but now must spread these commissions over the estimated life of the contract (including expected renewal periods based on historical customer experience) to align the payments with the revenue being generated.
- Subscription-based contracts commonly go through mid-contract modifications, which may now result in one of three different possible accounting outcomes. In addition, tiered- or usage-based pricing makes the determination of contract transaction price difficult. Companies may be forced to adjust their contract designs, pricing models, sales forecasts, sales team management, and practices for modifying and managing contracts to ensure accounting considerations are involved.
Companies offering price concessions through pre-determined contractual adjustment or other means require top-line revenues to be adjusted for the reduced pricing to customers, rather than recognition as an expense after contract inception.
Jennifer Louis has over 25 years of experience in designing and instructing high-quality training programs in a wide variety of technical and “soft-skills” topics needed for professional and organization success. In 2003, she founded Emergent Solutions Group, LLC, where she focuses her energy on designing and delivering practical and engaging accounting and auditing training. Jennifer started her career in Audit for Deloitte & Touche LLP. Jennifer graduated summa cum laude from Marymount University with a B.B.A. in Accounting.