The new revenue recognition standard includes important provisions that manufacturers need to be aware of. Effective 1/1/2019 for private companies with calendar year ends, the new standards will change the way manufacturing companies recognize revenue.
Variable Consideration
Manufacturing companies will often offer sales incentives to their customers, such as rebates, volume discounts or other price concessions. These incentives create variability in the pricing of goods or services offered to customers. Under the new standard, if the transaction includes variable consideration, the company would be required to estimate the transaction price by using either the “expected value” approach or the “most likely amount” approach, depending on which method the company expects to better predict the amount of consideration to which the entity will be entitled. Judgment is necessary in determining whether the expected value or the most likely amount is more predictive of the amount of consideration in the contract.
Regardless of which technique is used to estimate the transaction price, some or all of an estimate of variable consideration is only included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As a result, companies may have to recognize some or all of the probability-weighted amount or most likely amount estimated.
Contract Costs
The new standard also provides guidance on accounting for costs associated with obtaining or fulfilling a contract. Incremental costs of obtaining a contact, such as sales commissions and fulfillment costs not included in the scope of other guidance, should be generally capitalized when those costs are expected to be recovered and they are directly related to a contract. There is a practical expedient allowing companies to expense these costs if they are expected to be amortized in less than one year. Under current standards, there is limited guidance related to these costs and many companies have generally elected to expense these costs immediately.
These are just a couple considerations for manufacturing companies. Many companies may think their businesses and sales processes are not complicated enough for this new standard to have a significant impact on how they recognize revenue, but don’t assume this. The standard contains provisions that may create unexpected issues for certain manufacturing companies. Contact an Anders advisor to make sure your company is prepared for the new revenue recognition standard.
