Like tax regulations, generally accepted accounting principles (GAAP) continue to change.
The Financial Standards Accounting Board has approved two changes that will alter how companies recognize revenue and record leased assets. Although these changes aren’t immediate, it’s important to be aware of what’s coming. Here’s a summary of the changes you can expect if your company uses or issues GAAP basis financial statements:
Changes to revenue recognition
The changes to revenue recognition take effect for non-public entities with periods beginning on or after Dec. 15, 2018 (one year earlier for public companies). While they won’t drastically affect retailers and wholesalers, they could significantly alter how manufacturers, contractors, and service providers recognize revenue.
The changes will emphasize “performance obligations” within a contract. What would be considered one contract under current GAAP could be split into multiple contracts under the new guidance. For example, a design-build contract could have one performance obligation for the design work, and another for the build work. It could also mean that a manufacturing company that recognizes revenue as a project is built would be required to delay recognition until the performance obligation is met—i.e., upon delivery.
Companies will also need to review how they recognize revenue from change orders, claims, performance bonuses, and other revenue streams. What’s more, they will need to evaluate any penalties for late delivery or poor performance.
Changes to leased assets
Right now two categories of leases exist: capital and operating. Capital leases are treated like equipment purchases; they are capitalized on the balance sheet as an asset, and a liability is recorded for the remaining payments. Operating lease payments are expensed as paid.
Effective for non-public companies with periods beginning on or after Dec 15, 2019 (one year earlier for public companies), all leases longer than 12 months must be reflected as a “right-of-use asset” on the balance sheet. They must also be discounted to the present value of the payments with an offsetting liability. This classification applies to personal property (equipment) and real property (land and buildings).
Additional information to come soon
Some of the details are still being worked out, so expect to hear more from us within the next several months. In the meantime, please don’t hesitate to give us a call if you’re wondering how these changes may affect you.
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