What is the new revenue recognition standard
The Financial Accounting Standards Board (FASB) issued in 2014 , by means of the ASC 606 Revenue from Contract with Customers, a few norms and standards related to revenue recognition in accordance with accounting principles generally accepted in the United States, the USGAAP.
This new model replaces most of the previous guidelines — including the ones which are specific to each sector — and fundamentally changes the way in which entities should treat revenue recognition, especially those involving aggregate products and/or services.
When will it take effect?
The rules for private companies — those with privately held ownership — apply to fiscal years beginning after December 15, 2019.
Public companies have already been complying with the new rule from January 1, 2018.
The central principle of the new standard is the recognition and classification of revenues related to “transfer” of goods or services in accordance with the contractual performance obligations.
The standard will apply to all types of industries and valid contracts involving services and aggregate products — unlike the previous regulation, which applied specifically to each segment of operation. This way, services and products defined as part of the scope of the contract must be analyzed and priced individually, and the recognition of revenue from each element of the contract only happens through the satisfaction of all performance obligations defined by the contractual element.
Private US companies should re-evaluate their contracts to comply with the new guidelines established by the FASB, so the guidance of an accountant familiar with the matter is essential.
Who should comply with the rule?
Private companies that report financial statements in accordance with US accounting standards.
What happens to those those who do not comply?
Non-compliance with ASC 606 can negatively impact the credibility of your company’s financial statements, resulting in adverse audit opinions and even tax implications for your company.
This new revenue pattern will affect many areas of your business — including recognizing, drafting contracts, measuring and disclosing revenue streams, cash flow, income tax, and even more complex financial considerations.
To keep up with the new standard, the solution is the mapping of the revenue recognition policy and the structuring of the accounting process.
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