Do you know how your company counts revenue? Even if the answer is yes, it may be time to relearn, as two of the world’s foremost accounting regulatory bodies have adjusted revenue accounting rules for 2017 and beyond.
Through new rules, set to take effect on Jan. 1, 2017, most companies will be affected due to a variety of changes specific to various industries and countries. In many industries, companies will be able to recognize revenue earlier, thus being able to report profit sooner than previously possible.
The changes were handed down by the Financial Accounting Standards Board — the regulatory body for U.S. companies — and the International Accounting Standards Board — the body that governs the EU and other selected countries. The U.S. companies will not be allowed to implement the new rules before 2017, but companies operating under the International Accounting Standards Board may implement the rules before that date.
According to New York Times (NYT), these changes may result in more disclosures for companies affected. “Because there is a greater need to estimate, there is a greater need to disclose,” said Russell Golden, the chairman of the Financial Accounting Standards Board, in an interview. He said that these disclosures would be included as footnotes of financial reports “so that investors and other users of financial statements better understand the economics behind the numbers.”
For one example of how the rules will change one industry’s accounting, the NYT mentions the cell phone industry. When a customer purchases a phone with a two-year contract, under the old rules, the cell phone company would only be able to count the purchased phone itself as revenue. Under the new rules, however, the company can split the revenue into two sections — service and equipment — and count the expected revenue for the life of the customer’s contract.
Especially with the role of in-house counsel on the business operations side ever increasing, working with your accounting team to abide by these new regulations is crucial. Especially for U.S. companies, which will have to abide by the new standards instantly at the beginning of 2017 but not before that date, preparation should begin sooner rather than later.
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