Heads up, private companies: Brace for changing accounting standards, CPA says

The heart of the matter: How revenue is recognized in generally accepted accounting principles

By Brett Johnson
New Jersey | Dec 17, 2018 at 7:05 am

Stephen Mannhaupt expects business owners have heard by now — maybe only in passing — something about a change in revenue recognition regulations.

But, if you’re a business owner in New Jersey, now’s the time to start paying attention, said Mannhaupt, a CPA and audit partner at Grassi & Co.

“This is actually something all companies need to be prepared for,” he said. “Companies across all industries are going to be migrating to much more qualitative and quantitative disclosures — whereas those weren’t warranted in the past. At the least, any company will have to deal with that.”

As of this week, any private company will have to comply with a different set of standards around how businesses recognize their revenue on financial statements to remain in accordance with generally accepted accounting principles.

The bottom line? The cost of this rule change will come down to whether a company has the manpower required for complying with a more stringent accounting model in tracking revenues.

“Companies will need to consider whether they can get through this process with existing staff, or whether they need to hire more people to assist or work with outside vendors or consultants,” Mannhaupt said. “These are all questions companies should be thinking about now.”

Larger entities might not have a problem with that, given that they may already have sufficient financial personnel on hand. All those internal resources would need is a new guidebook.

“But firms on the smaller side might not have that,” he said. “And, if company leaders try to do this on their own while managing their company, they might find they they don’t have time for it. So, it’s time for them to take a hard look on whether they should bring in accountants and auditors to make sure they’re in compliance.”

The Financial Accounting Standards Board issued new rules to introduce more consistency across different industries and geographies, where there may have been different guidance on revenue recognition or none at all. The regulation kicked in last year for public organizations, and the compliance date for private entities had been given a grace period that ended Dec. 15.

Certain industries could be particularly affected by this update, Mannhaupt said. The construction sector, for instance, was once able to consider one contract as a single economic unit with revenues spread evenly across it. Now, those in the industry will have to look closer at contracts and determine if there are multiple performance obligations within it that have distinct revenues attached to them that need to be individually recognized as revenue.

And all companies can expect to do a lot more digging into the details of their revenue streams, Mannhaupt added, even if some industries will have more an impact from this than others.

The punishment for not being in compliance is indirect — although still profound. No monetary penalty will be incurred, yet not complying would mean financial statements might not be in accordance with what lines of credits at banks or other financial institutions require.

Given its newness, there’s lot to learn about how the change may shake up internal accounting. From Mannhaupt’s perspective, the good thing is the yearlong head start public entities had has provided a glimpse at how this change should be addressed by a private company.

The important thing now, he said, is that companies start using that to their advantage.

“The fear is that companies are not in the position right now where they’ve put enough effort into understanding this and how it will impact their business,” Mannhaupt said. “No one is going to be glad they waited a long time to figure it out.”