Private Companies: Avoid Revenue Reckoning — Tackle Revenue Recognition Now

Chris Wright, Managing Director Global Leader, Business Performance Improvement Practice

As of January 1, 2019, private companies are required to comply with new revenue recognition rules designed to make accounting more transparent and uniform across industries. This change is part of a broader initiative to align global accounting rules and replace outdated proscriptive practices with a more principles-based approach. The new revenue rules can be found at FASB ASU 2014-09.

For public companies, the rules became effective beginning with their first quarterly report in 2018. Private companies were given an extra year to comply. In practice, many private companies have almost another year to catch up to the standard because they only produce annual audited financial statements. Even so, we would strongly recommend against waiting until the last minute, considering the potential for missed opportunities and the need to be ready for other new accounting changes on the way. Others, such as the American Institute of Certified Public Accountants (AICPA), share this concern.

The fact that the AICPA felt the need to address the topic tells me they’ve received feedback that some private companies may be dragging their feet. And while it is technically possible to comply at year-end, waiting may not be the best option. Here are three reasons why:

  1. There are other new standards coming. Waiting until the last minute could create bottlenecks later in the year as companies adapt to other new accounting standards affecting leases and, in the case of financial institutions, current expected credit losses (CECL). For many private companies, the changes from the new revenue recognition standards may not be significant. Others, however, may have to make substantial changes — to systems, processes, reporting and training. The only way to know for sure how any individual company will be affected, is to conduct a thorough assessment now. Many of the resources required to implement revenue recognition changes will also be required to make the other changes mentioned above. So it makes sense to make good use of the available time, and look for any overlaps that would create implementation efficiencies down the road.
  • IPO readiness. With an unpredictable market and other possible bumps on the horizon, private companies considering an initial public offering (IPO) would be wise to prepare, in advance, for the optimal go-to-market window. Public companies are already required to comply with these accounting rule changes, so it is important for IPO-ready companies to comply as soon as possible, to avoid costly delays.
  • Acquisition positioning. Companies trying to position themselves as attractive acquisition targets need to adopt public company accounting standards for reasons similar to those of companies considering an IPO. Acquisitions are expensive, and the more a potential acquisition target can do in advance to increase post-merger compatibility, the better the chances of garnering an attractive offer. Conversely, not being ready, or not having a plan, could be a limiting factor in their ability to attract a suitor at an optimal price or timing.

Market opportunities are fleeting, and the pace of change is accelerating. The companies that are poised and ready to take advantage of hot markets, or react to cool markets, are going to be those that have done the work. Check out previous blog posts on the new standards and let us know your questions in the comment section.

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