Many companies are considering how the pending introduction of VAT in both KSA and the UAE will affect their financial processes and systems. Another equally significant development to bear in mind when looking at your financial systems is that in May this year it was the second anniversary of the publication of the landmark revenue recognition standard. U.S. companies and their auditors have a lot of work to do before it goes into effect.

Revenue is a critical financial measure for businesses and their stakeholders. Company management, shareholders, lenders, analysts, investors, and regulators use revenue to monitor a company’s financial performance and general financial health. Revenue may also affect, among other things, an entity’s ability to attract investors and borrow money, and is also often used as a basis for determining certain employee compensation and benefits, like commissions, bonuses, and stock-based compensation. Anticipated revenue may also influence an entity’s tax-planning strategies.

The new, converged revenue recognition standard that’s in the final stages of development by FASB and the International Accounting Standards Board is expected to lead to at least some changes in financial reporting for virtually all entities that use U.S. GAAP or IFRS. Here’s an overview of what’s happened over the last two years—and the details that still need to be worked out. Expect to see a lot more demand for reports and BI.As companies move to the new standard, their
compliance risk is likely to increase unless they have a well-planned, comprehensive approach to adoption.

The implications of the new standard are far broader than simply changing accounting and reporting methods, although that change itself is highly complex. Because so many parts of a business are tied to revenue, the new guidance will have a pervasive organizational impact, affecting such areas as executive and sales compensation, debt covenants, taxes, and even product offerings and how products are sold. Systems and processes will need to change to accommodate the new standard, and an entire education and training program will be essential to retooling the organization to meet the standard’s requirements. Communications with outside stakeholders, including suppliers, customers, and to investors will be an important part of the transition. None of this can happen overnight. This transition is complicated and difficult, and
organizational leadership will need to be involved.

At its core, the guidance seems simple enough it and requires that an entity should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Just 37% of more than 140 companies surveyed by KPMG LLP said they are on the right track in their implementation of the new revenue recognition standard issued by FASB and the International Accounting Standards Board (IASB), which takes effect at the beginning of 2018 for public companies.

Meanwhile, new lease accounting requirements have companies attempting a challenging process of locating all their lease agreements and extracting data points from them that haven’t been necessary for accounting in the past. This is a challenge because more than two-thirds (68%) of companies surveyed by PwC and commercial real estate services and investment firm CBRE have used spreadsheets as their primary system for tracking leases, and 84% currently abstract key terms from their lease agreements manually. -Major changes ahead.

In 2014, the Financial Accounting Standards Board (FASB) published Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the previous hodgepodge of revenue recognition requirements. Under the new rules, companies worldwide will follow a single set of principles for reporting revenue from customer contracts.
The principles-based guidance will require companies to follow five steps when deciding how and when to recognize revenues:
1. Identify a contract with a customer
2. Separate the contract’s commitments
3. Determine the transaction price
4. Allocate a price to each promise
5. Recognize revenue when or as the company transfers the promised good or service to the customer, depending on the type of contract

In some cases, the updated guidance will result in earlier revenue recognition than in current practice. This is because the new standard will require companies to estimate the effects of sales incentives, discounts and warranties. The breadth of change that will be experienced depends on the industry. Companies that currently follow specific industry-based GAAP, such as software, real estate, asset management and wireless carrier companies, will feel the biggest changes. The new rules also provide guidance for transactions that weren’t addressed completely, such as service revenue and contract modifications.

Existing compensation arrangements may not contemplate the new standard, and the effects of the standard on compensation arrangements differ by industry and the individual company. The new standard could result in earlier recognition of revenue, which could lead to higher commissions or bonuses—one reason companies may need to include human resources in their discussions as they implement the standard

Nearly all companies will be affected by the expanded disclosure requirements. The new rules call for detailed footnote disclosures that break down revenues by product lines, geographic markets, contract length, services and physical goods.
Exceptions to the new rules include: insurance contracts, leases, financial instruments, guarantees and nonmonetary exchanges between entities in the same line of business to facilitate sales. These transactions remain within the scope of existing industry-specific GAAP.

Implementation challenges
In April 2015, the FASB decided to delay implementation of the converged revenue recognition standard by a year. The effective date was originally set for 2017, but many companies told the FASB that they needed more time to implement the new guidance because of the breadth of change and importance of revenue in a financial statement.
. Foreign companies are generally more familiar with the principles-based accounting employed by the new revenue standard.

To help facilitate the implementation processes, the FASB and IASB established the joint Transition Resource Group (TRG) for revenue recognition.

Principal vs. agent considerations

Some recent clarifications of the revenue recognition standard relate to principal vs. agent determinations. TRG members were particularly concerned with sales where a principal supplier can’t immediately recognize a sale because it’s dependent upon the agent for setting the price when the sale is made or contract signed.

These discussions resulted in the publication of ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), in March 2016. The amendments apply to sales that involve two or more suppliers to a customer, where one supplier controls the good or service being sold and the other supplier or suppliers are agents and collect fees or commissions for arranging the sales. Examples include 1) online sales in which a business maintains a website from which consumers may purchase goods from multiple suppliers, and 2) custom orders that a supplier outsources to a contract manufacturer to make the product.

The revised guidance clarifies how a business determines whether it is a principal or an agent. Sellers must identify the good or service being sold and their role in the sale. In doing so, they should focus on the good or service being sold and not the promise to transfer the good or service, or what the board calls a “performance obligation,” in part because stressing the promise related to the sale would be confusing for an agent.

Work in progress

The FASB is currently drafting proposals to clarify the “collectability” threshold contained in the revenue recognition standard and provide a practical expedient for footnote disclosures on royalties received for licenses of intellectual property and variable payments connected to individual commitments in customer contracts.

Other issues include:
• Contract modifications. The FASB’s staff contends that an asset from a modified contract should be carried forward after the contract has been adjusted. It disagrees with an alternative interpretation that calls for writing off the asset when the contract is modified.
• Loan servicing agreements. The FASB’s staff says these agreements aren’t covered by the new revenue recognition standard. Instead, they should be accounted for under Accounting Standards Codification Subtopic 860-50, Transfers and Servicing — Servicing Assets and Liabilities.
• Transfer of control. The FASB’s staff believes that control of a good or service for a contract that’s satisfied over a period of time doesn’t transfer to the customer at discrete points in time.
• Accounting for customer options and incentives.

Recent clarifications

– Permits an entity, as an accounting policy election, to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price.
– Specifies that the measurement date for noncash consideration is contract inception and clarifies that the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration.
– Provides a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented in accordance with the standard when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.
– Clarifies that a completed contract for the purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application.
– Permits an entity to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed contracts.
– Clarifies that an entity that retrospectively applies the guidance in the standard to each prior reporting period is not required to disclose the effect of the accounting change for the periods of adoption. But an entity is still required to disclose the effect of the changes on any prior periods retrospectively adjusted.

Implementation of the new revenue recognition standard will require significant effort by U.S. companies, including: analyzing customer contracts, designing and installing new financial reporting systems, and upgrading financial reporting controls to deter fraud.

How to identify performance obligations and licenses
On April 14, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.

The amendments simplify and lower the cost of applying the guidance for identifying a performance obligation and make it easier to understand the implementation of the revenue standard’s licensing guidance. The amendments clarify how to determine whether goods or services are distinct performance obligations. They also provide an exception for goods and services that are immaterial in the context of a contract. Additionally, the updated rules allow companies to account for shipping and handling that takes place after the customer has gained control of the goods as an action to fulfill the contract rather than a separate service. The clarification to the licensing guidance is intended to make it easier to account for intellectual property that’s considered functional such as:
• software for a business process
• media content that can be played or aired
• symbolic e.g. a trademark for which an organization can purchase the rights.
The nature of the intellectual property determines how it should be accounted for under the revised guidance.

During the transition to the new standards , companies will need to present their financials using both the current and new standard. This places a significant burden on finance staff—especially since much of the work done to reconcile the revenue accounting for bundled contracts is done manually via spreadsheets, a process that is both time-consuming and subject to
human error. Simply throwing more bodies at the problem may not be practical in the long run. Companies will likely
need technology solutions that can reduce the amount of manual calculation involved in accounting for revenue and related costs.
For many companies these are now urgent requirements:
• Flexible, dimensional multi-company COA -Dynamics Ax, Sunstems
• A strong integrated Project Accounting module – Dynamics Ax
• Financial management reporting tool. with drilldown to transaction Dynamics Ax Management reporter, Prophix CPM, Infor Vison Q@A, Power Bi, BI4Dynamics
• Detailed audit trail of financial transactions,
• Workflow approvals, case management, Alerts, – Dynamics Ax
• Dashboards and kip monitoring -Dynamics Ax

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