January 17, 2018 | Authored by: Michael Isaacs
New revenue recognition standards and the prophets of doom
The prophets of doom are enjoying a payday with the new revenue recognition standards issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).
So-called “market experts” (our modern-day prophets) have been busy issuing dire warnings, predicting that companies who don’t adopt the new standards early enough will be unable to close their books, with their stock value crashing as a result.
A less commonly aired view – but one that receives attention in a new white paper – takes a more discerning approach. Authored by the financial experts at Proformative, the white paper argues that the new IASB and FASB revenue recognition regulations will not necessarily force all companies to undergo dramatic change. It all depends, says Proformative, on the company’s product and service offerings, their charging model, their billing relationships and other factors.
Subscription businesses, for example, should be minimally impacted by the new revenue recognition standard. One reason for this, of course, is the fact that the long-standing revenue recognition best practice for such businesses already conforms with the principles championed by the guidelines and as expressed in the “Five Steps” for determining how revenue should be recognized.
Take, for example, a recurring digital subscription - say $9.99 a month for access to an entertainment service, and see how it already complies. A consumer subscribes to the service (Step 1). The merchant grants access to the content (Step 2). The price is fixed (Step 3). The vendor’s performance obligation is to provide access to the service (Step 4). And the revenue is recognized on a daily basis (Step 5).
STEP 1: Identify if there is a contract with a customer
STEP 2: Identify separate performance obligations in the contract
STEP 3: Determine transaction price.
STEP 4: Allocate transaction price to individual performance obligations in the contract
STEP 5: Recognize revenue when or as the entity satisfies performance obligations
This admittedly highly simplified view of the obligation does nevertheless reflect the reality. For many subscription companies, deploying the new revenue recognition standard may well require a minimal effort.
So why all the excitement surrounding the guidelines? Is it possible that some of those drumming up the drama are also seeking to profit from their prophecies by touting a solution they happen to have at hand?
For additional information, attend the live webinar "Revenue Recognition Implementation Considerations and Impact on Subscription Services" presented by Vindicia and Softrax on Thursday, February 15, 2018 at 10:00 to 11:00 am PST. Blagoja Golubovski, Vindicia director of product management, and Kristen Lawson, Softrax sales engineer, will discuss the actual impact of the new FASB and IASB revenue recognition standards on subscription businesses.
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