How Revenue Recognition Impacts Companies
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Jen: This is the PKF Texas Entrepreneur's Playbook. I'm Jen Lemanski, and I'm here with Danielle Supkis Cheek, a director in our Entrepreneurial Advisory Services group. Danielle, welcome back to the Playbook.
Danielle: Thank you for having me again.
Jen: I know revenue recognition is a hot topic right now; we're getting ready to go into audit season. What are some trends you are seeing where clients need to get ready since it's kind of a new thing that they should be ready for?
Danielle: A lot of clients, particularly certain industry types, have a tendency to kind of not dismiss revenue recognition, but they don't perceive it as large of an impact. There's a lot of areas where the revenue recognition rules effectively didn't change too much, but there's some really specific nuances that did change, as well as the auditors are going to be looking at how did somebody assess to see if it changed or not. So even in industries that didn't change very much, there is a certain amount of documentation that needs to be in place for the company having assessed it.
Revenue recognition is one of the few standards that actually impacts your daily transaction level of work. Most the time when you have a big financial standard coming out, it's a more presentation, maybe it's a new disclosure, maybe it's a true up calculation. Even the lease standard that's coming out is kind of a more special circumstance type of thing—not a daily in your invoicing, in your billing, day-to-day transactions. So, people aren't looking at it the same way that they probably should be.
So, if you're not overly impacted by the revenue recognition standard, you still need to go through… there are certain checklists that you can get. We, of course, have those checklists for our clients, so if somebody can reach out to us, we’re happy to provide this checklist to kind of make sure you've made all the considerations to make sure you're not impacted. And those that have major impacts, there's a lot of areas that can have large swings to your revenue. And one company might think, “Well, you know, at the end of the day, my price for my contract is the price for my contract.”
Danielle: It's not going to make that big of a difference; it's just a cut-off issue and well, that's true.
Jen: There's a little bit more to it.
Danielle: There’s a little bit more to it. And that cut-off could be really important for your operation, so if you've internally been preparing your financial statements under the old, what’s called the 605 rules, the standards section, you could have a major swing that you're having to go present to a board, a bank, a bonding company, somebody like that.
Jen: And they are going to be asking all sorts of questions.
Danielle: And they are going to spend more time. So, if you do have a major impact, even though we only have just a little bit of time before audit season starts, maybe getting in front of those users of the financial statements that have been seeing interim financials, kind of mentally preparing them that the audit process may have a larger swing than what you're typically used to, kind of explain that cut-off issue, of course, go through the checklist to make sure you can figure out the numbers. And then honestly, they're not going to like to hear this and a lot of people don't like it, but audit fees are going to increase because of this standard.
Jen: There's more work.
Danielle: There’s more work to be done. You have to review more contracts, so there's a lot to be done in this busy season coming up.
Jen: Perfect. Well, this is relatively new for the private companies; the public companies have been doing this for several years now, correct?
Danielle: Yes, the public companies… And another good comment is you can also always go to public company filings to see how they did things and use lessons learned from public companies, and there's some very reputable groups that are writing articles of lessons learned from the public company filings.
Jen: Great. Well, perfect. Well, we'll get you back to talk a little bit more about it soon.
Danielle: Sounds great.
Jen: For more information about revenue recognition, visit www.PKFTexas.com/RevenueRecognition. This has been another thought leader production brought to you by PKF Texas the Entrepreneur’s Playbook. Tune in next week for another chapter.