Navigating Revenue Recognition

The full impact of changes resulting from adoption of the new revenue recognition standard (ASC 606) is a must for Alaska Native Corporations (ANCs) to understand and address. It can significantly change revenue recognition for ANCs, especially those that are involved in government contracting. The revenue standard has widespread impact and time sensitivity. From financial statements and taxes to business processes and internal controls over financial reporting, the new standard has broad implications that may cut across your organization.
 
A holistic view of revenue recognition shows the audit and tax implications that can be addressed through strategic, efficient planning. This planning includes:

1. Identifying the contract.

2. Identifying performance obligations.

3. Determining transaction price.

4. Allocating transaction price to performance obligations.

5. Recognizing revenue as performance obligations are satisfied.

 
Revenue streams most likely to be materially impacted must be identified and evaluated, followed by an assessment of tax implications of any financial accounting changes. A technical analysis of each revenue stream identified will need a revenue recognition policy prepared. Finally, financial reporting disclosures related to the adoption of the new standard and the associated revenue recognition policy must also be prepared.
 
The new standard may change the timing and method of ANC revenue recognition.
 

BDO Insight

BDO sees the biggest challenges in the following areas:

• Variable consideration. ASC 606 requires estimates for variable consideration to be included in the transaction price. Specific considerations include requests for equitable adjustments, claims, and provisions for liquidated damages. In addition, an estimate of variable consideration related to performance requirements on cost plus fee contracts must be included in the contract price.
• Identification of performance obligations. This can be a challenge, especially for larger contracts with multiple contract line item numbers. ANCs must perform careful analysis of their contracts to identify each performance obligations in the contract and conclude whether they represent:
  • A single performance obligation (e.g., because the company provides significant integration service related to those activities), or
  • Multiple performance obligations that need to be broken out separately from the contract in order to accurately capture revenues in accordance with ASC 606

A game plan for implementation will reduce the time and effort for a successful transition. BDO has a dedicated Accounting & Reporting Advisory Services team to support organizations through the process of implementing new accounting standards. Contact us for help developing your plan.
 

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