Revenue recognition standards determine both how much and when revenue is recognized on the income statement…so that’s a big deal.
The new revenue recognition rules came into effect for non-public companies for fiscal years beginning after December 15, 2018. So this is still a fairly new topic for integrators, and we receive lots of questions about best practices for implementing the new standards.
The standard eliminates the transaction, and industry-specific revenue recognition guidance, and replaces it with a principle based approach for determining revenue recognition. In simplest terms, the new standard drives a Balance Sheet approach vs. an Income Statement approach.
This standard has the potential to affect every integrator’s day-to-day accounting, and the way business is executed through contracts with customers.
The challenges that integrators are facing as they transition to the new Income Statement approach is the subject of this week’s video. Brad Dempsey, CEO of Solutions360, and Steve Riley, Senior Consultant with Navigate Management Consulting break it all down.
What are the challenges you see with integrators understanding the difference between cash and revenue?
“What I see integrators doing all the time, for service contracts, is recognizing all the revenue upfront,” says Riley. “That leaves them bone dry throughout the rest of the year, if they have any costs that they need to cover. This can lead to real financial trouble. And of course, this is not GAAP compliant.”
What about the concept of invoicing vs. cash vs. revenue?
“Well, what we certainly see is that when you cut an invoice, this does not mean you’ve earned any revenue,” says Dempsey. “There is something in accounting called the matching principle and that means that you have to tie the costs associated with earning revenue together in the same time period. So just because you cut an invoice doesn’t mean you actually delivered the services or products that you got paid for. And GAAP says that you have to line up those costs with that revenue.”
Watch the video for the full discussion:
Revenue Recognition Basics with Brad Dempsey
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