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Revenue Recognition Criteria: Choosing the Full or Modified Retrospective Method for IFRS 15 & ASC 606

Mark Severance Tue, May 23, 2017

revenue recognition criteria

Private and public companies are facing the biggest revenue recognition criteria change in a decade. Upcoming IFRS 15 and ASC 606 revenue recognition guidelines are designed to increase financial statement comparability across companies and greatly simplify the current revenue recognition criteria.

Starting in 2018 for public companies and 2019 for private companies, these guidelines from the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) will require companies to reallocate revenue with greater frequency—each time a customer contract changes—and defer expense recognition to align with the contract’s delivery.
As a result, contract add-ons and renewals must be integrated into a single contract and will trigger reallocations across both past and future periods—causing continuous revisions to revenue allocations and expense alignment.

Companies must choose one of two ways for complying with these new standards—a full retrospective or a modified retrospective approach. While each has their pros and cons, they both require organizations to account for contracts under both the old and the new guidance before and during the transition year.

The full retrospective approach
Under the full retrospective approach, companies retroactively treat all contracts as if IFRS 15 and ASC 606 were already in place, which means their prior-period financial statements would reflect the new standard. A public company with a calendar year-end would recast its 2016 and 2017 financial statements in its 2018 annual financial statements. According to PricewaterhouseCoopers, “while this transition method could be more demanding from a recordkeeping perspective, it would result in greater comparability and would likely be preferred by the analyst and investor community.”

The modified retrospective approach
Here, the new standards are applied to all new contracts started on or after the effective date. For contracts with remaining obligations, you’ll enter an adjustment to the opening balance of your retained earnings account. Prior-year financial statements will not need to be recast, which can help you come into compliance more quickly. However, you will have to keep two sets of accounting records for the year the new guidelines are adopted, so you can properly disclose line items in the financial statements as if they were prepared using the current standard.

Which approach should I choose?
There is no clear answer to that question. According to a Deloitte survey, 38 percent of companies were planning to use or had a “ preliminary leaning” toward adopting the full retrospective method, and 25 percent were for the modified retrospective approach. A full 37 percent were undecided.

Experts at Deloitte & Touche recommend that companies consult with key stakeholders and seek to understand what similar companies are doing. However, they also note that the greater the potential differences between your legacy revenue accounting and the accounting for revenue under IFRS 15/ASC 606, you should consider the full retrospective transition method.

Intacct and Arxis to the rescue
Whichever method you choose, the transition period can overwhelm your finance teams with manual processes and complicated spreadsheets. That’s where Intacct Contract and Revenue Management comes in. It completely automates dual reporting and posting with different accounting treatments for current and IFRS 15/ASC 606 guidelines, saving you hours of time and effort.

The experts at Arxis Technology can further ease the transition with professional implementation and support. The time to get started is now.

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