BATS Xpress, LLC

As we enter the second quarter of 2023, small businesses need to stay up-to-date with the latest accounting rules and regulations. This is important not only for tax purposes but also for maintaining financial stability and achieving long-term success. In this blog post, we will discuss the new revenue recognition standards that small businesses should be aware of, as they will significantly impact financial statements.

Background on the New Revenue Recognition Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The purpose of this update was to simplify and standardize the accounting treatment for revenue recognition across industries. The new revenue recognition standards replace industry-specific guidance with a single, principles-based approach.

The new standards require businesses to recognize revenue when goods or services are transferred to customers in an amount that reflects the consideration the business expects to be entitled to in exchange for those goods or services. This means that businesses must recognize revenue at the time of delivery, rather than when they receive payment.

While public companies were required to adopt the new standards in 2018, private companies and non-profit organizations must implement the new standards by January 1, 2024.

How the New Revenue Recognition Standards Affect Small Businesses

The new revenue recognition standards will have a significant impact on small businesses, particularly those in the service industry. Many small businesses rely on contracts and agreements with customers to generate revenue. Under the new standards, businesses must carefully evaluate their contracts to determine when revenue should be recognized.

For example, let's say a small consulting firm enters a contract to provide services to a customer for a period of six months. Under the old revenue recognition standards, the consulting firm would recognize revenue as payments were received over the six-month period. However, under the new standards, the consulting firm must recognize revenue as services are provided, regardless of when payment is received.

Small businesses must also consider how the new standards affect their financial statements. Under the new standards, businesses must provide more detailed information about revenue recognition in their financial statements. This includes disclosing the significant judgments and estimates made in determining revenue recognition, as well as the timing and amount of revenue recognized.

Preparing for the New Revenue Recognition Standards

Small businesses need to start preparing for the new revenue recognition standards now to ensure they are ready to implement the changes by the required deadline. The new standards apply to all businesses that enter into contracts with customers, regardless of size or industry.

To prepare for the new standards, small businesses should:

1. Review their contracts with customers to determine how revenue should be recognized under the new standards.

2. Evaluate their accounting systems and processes to ensure they can accommodate the new standards.

3. Provide training for employees to ensure they understand the new standards and how they affect the business.

4. Consider hiring an accounting professional to assist with implementation and provide guidance on the new standards. (Contact your BATS Xpress team if you need more information about how this will impact your particular situation)

Conclusion

The new revenue recognition standards will have a significant impact on small businesses, particularly those in the service industry. Small businesses need to start preparing for the new standards now to ensure they are ready to implement the changes by the required deadline. By reviewing contracts, evaluating accounting systems, and providing employee training, small businesses can ensure they follow the new standards and maintain financial stability for long-term success.

References:

1. Financial Accounting Standards Board (FASB) website: https://www.fasb.org/home

2. American Institute of Certified Public Accountants (AICPA) website: https://www.aicpa.org/content/aicpa/home.html

3. Small Business Administration (SBA) website: https://www.sba.gov/

4. Accounting Today: https://www.accountingtoday.com/

5. Journal of Accountancy: https://www.journalofaccountancy.com/

6. National Association of Certified Public Bookkeepers (NACPB) website: https://www.nacpb.org/