Revenue recognition and leases: Angles you might have missed
August 1, 2018 | Faye Hayhurst, CPA
After years of articles, news releases, CPE classes, and yes, posts by innumerable bloggers, I’d venture to say that it’s a rare CPA who hasn’t heard about the impending standards changes on two major topics: leases and revenue recognition.
While there are many entities that will see significant changes in accounting, reporting, software and system design due to these new standards, some nonpublic entities may be yawning and offering a “ho hum, neither of those changes really apply to our organization.”
To those entities, don’t nod off just yet. Here’s a look at two angles to the standards that can be easily missed.
The new guidance established the following core principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services.
Five steps should be applied to achieve the core principle:
- Identify the contract with a customer.
- Identify the performance obligations (promises) in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the reporting organization satisfies a performance obligation.
The missed angle:
Documentation. Perhaps you’ve reviewed your revenue streams and concluded that changes to current accounting are not required. Take the time to document each of those revenue streams, including the company’s performance obligations and how it’s determined that they have been satisfied.
Your auditors will be reviewing whether your company follows GAAP when it comes to revenue recognition. Surprise them by providing this to them in writing before they ask. Do this now, before the standard’s effective date, in case they find a flaw in your reasoning.
The biggest change of the new standard is the requirement that lessees must recognize on their balance sheet the assets and liabilities for the rights and obligations created by each lease. Lessees will be required to recognize assets and liabilities for leases with lease terms of more than 12 months.
The missed angle:
Embedded leases. OK, you know about your leased office space and the office copier. What about cloud computing contracts that include hosted servers? Or any other “service contracts” that have an equipment component? Check the wording of each contract for references to such assets and whether a part of the contract price is allocated to equipment rental, and review the length of the lease in light of the ASU requirements.
Documentation counts here as well. Know where your company’s contracts are and document your review of them and whether they are affected by the lease ASU.
Not so sure that you know whether the new standards will affect your organization? The MNCPA’s got you covered.
Or search our catalog using keywords “lease” or “revenue recognition” for more options, including webinars.
Topics: Accounting & Auditing
Faye Hayhurst, CPA
Faye Hayhurst is the MNCPA director of finance and administration. She is committed to using numbers to tell relevant stories, although she also employs words, charts and occasionally clothing to communicate a message. While some have questioned her about the pressures of being the CPA for the MNCPA, Faye considers presenting financial information to fellow CPAs a dream job. Outside of storytelling with numbers, Faye enjoys directing her church's handbell choir, visiting national parks and other scenic places, and checking out the chocolate products at Trader Joe's. Faye can be reached at 952-885-5540 or firstname.lastname@example.org.
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