Accounting for Revenue Changes: New Rules Coming in 2017

Whether you sell ice cream, cars, or computers, revenue is what keeps your business running. However, starting with the first accounting period in January 2017, new rules issued by the Financial Accounting Standards Board may change how you account for that revenue.

The Contract: You and Your Customer

One of the determinations business owners will have to make is what their current obligation is to their customers after the point of sale. For example, an office supply store which sells a ream of paper has no further obligation to the customer, unless the customer has received loyalty points which grant a discount that may be redeemed at a later time.  Under this scenario, business owners will need to reduce their immediate income by the projected amount of the discount the customer is entitled to, and claim the remaining income later, when the discount is used.

The contract between a business owner and their customers is outlined in a standard, five-point model that all companies can use. These five steps are:

  1. Contract with customer – Businesses will have to determine what agreement they have with their clients, and whether that contract is written or implied.
  2. Performance obligations – Businesses will have to determine what each party to the contract has to do in order to fulfill the terms of the contract.
  3. Monetary influence – The complete cost of the transaction must be estimated; in the case mentioned above, the cost of the ream of paper plus the cost of the eventual customer discount.
  4. Allocation of income – The overall income will have to be properly divided between the base cost of the initial product as well as the future performance of the parties to the contract.
  5. Recording revenue – Revenue will be recorded towards the contract as the contract obligations are filled.

Are Any Businesses Spared?

Every business owner will be impacted by these new accounting rules and regulations, except perhaps those who operate cash-and-carry businesses with no credit card payments, no rewards programs, and no future discount programs. In some instances, there may be an overlap in reported income between the 2016 and 2017 income reporting.

Accounting Notations Become Crucial

While the “good news” for many companies is the ability to report revenue sooner than they might otherwise have been able to, there is an increased reliability on disclosures, particularly for companies that are public and report their earnings. In these cases, particularly during the first couple of years, company analysts may have to depend heavily on these footnotes when they are valuing a company or comparing income from one year to the next.

There are some European companies that will be able to start this process early, but U.S. companies will not be able to work with the new accounting methods until the first reporting period after January of 2017. For some companies, these changes may mean a revamp of their current client contracts, which would allow them to prepare in advance for the projected changes.

Since all business owners depend on cash flow to keep their day-to-day bills paid, and the value of a company is largely based on their sales and income, preparing as soon as possible for these changes is critical for business owners who have any ongoing responsibility to their customers after the sale. This includes businesses who offer loyalty points, extended warranties, or other contracts which exist past the original date of sale.