Keeping Up With New Revenue Recognition Rules
[Here we go again. Another storm is brewing and is supposed to hit the Gulf this weekend. No No No!]
A few days ago I re-read some new financial regulations because I've been receiving emails about the new financial rules that will start this December. Since I don't do finance directly at this time, I haven't heard so much about this at work. It's been quiet. It may be because the owners dictate what they want to see or where expenses or revenue should go, although I would imagine some kind of consistency because the owners tend to buy and sell a bit. I imagine that after a while processes and accounting procedures would tend to converge. But I don't know since I'm not directly involved. I can only impute and the little I've seen seems to suggest a convergence of procedures in this industry.
But I went ahead and read up on FASB, even though I'm not directly involved. The first time I read it, which was a while ago, I couldn't really see a drastic change from what I was doing when I worked in another industry. I oversaw financials for outsourcing deals and for consulting projects before I came into this current industry and they were either a form of cost plus mark ups (not a
true cost plus but an unique variation) or time and materials projects. Revenue was accrued either when the cost was spent (cost plus mark ups) or when the time was done (time and materials). There was nothing complicated about them.
I re-read the new regulations or writings about them and I still don't really see much difference from what I was doing. If I ever go back into finance, I probably would have to consult with someone to make sure I do it properly. Probably the only thing that I think could be different would be accruing or booking revenue for each type of contractual obligation within a single contract rather than one single number.
The purpose of these regulations is to bring about consistency between FASB and the international boards and consistency of reporting amongst various industries so investors can better compare. There is supposed to be more transparency which I take to make that there will be more granularity in revenue reporting. Like I mentioned in the previous paragraph, instead of one revenue number booked each month, distinct revenues being booked for each obligation in a contract.
To kind of reiterate what I was reading, only to try to get some of it into my brain, I will repeat the 5 parts of the regulations.
- Identify the contract: This one I'm a little confused. Was it previously hard to identify the contract? Previously I always booked revenue by contract or project so I'm not sure what is different here. Forecasting was another story. I tended to forecast by program with core and projects forecasted separately, but I did not forecast each project, especially when I had 100+ projects.
- Identify the obligations: Here is where I start to think we may have to book revenue for each obligation within a contract. But the regulations didn't really say that. For main outsourcing programs or core programs, I would set up WBS structure to track the expenses of the main obligations so that is not a problem here. But I didn't book revenue at the obligation level, although I did use Access to report what the revenue should be for each obligation in the outsourcing program. For projects, we mainly used one WBS code unless we were contractually required to create multiple WBS or were requested to do so.
- Determine the transaction price: I'm confused here too. Is it transaction price for each obligation or for the total contract? Total contract value was pretty easy: the contracts we had spelled out the contract value and spelled out whether the contract was a cost plus, cost plus markup, time and materials or fixed price or some other variation. I dealt mainly with cost plus and time and materials. We even knew what each obligation was worth because we had pricing models. Sometimes the contract would spell out the contract value for each obligations.
- Allocate transaction price to the obligations: Here is where I think part 3 means total contract value. Again, I don't think this changes much what I've been doing, except I didn't book revenue per obligation. I booked revenue per contract. So that is my big question. And this one leads me to think revenue will be booked by obligations, not at top level of contract.
- Recognize revenue when obligation has been performed and satisfied. Again, I don't think this is changing what I used to do. Previously I did not book revenue until the costs were expended or the hours were booked. The T&M (hours) work were consulting work so I think that will remain the same. Unless they mean that no revenue could be booked until all consulting work was done. But I don't think so because even under the old rules, you couldn't book revenue until the service was delivered. Consulting is a different animal.
Anyway, this is my understanding of the new rules.
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