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New Rules, Rule

By November 27, 2017Newsletters

In the history of American football, there have been many “game changing” rules that have significantly impacted the way the game is played today. Famous plays, such as “The Immaculate Reception” or “The Holy Roller” not only ignited heated rivalries, but marked important changes to the rule book and the nature of the game, for better or worse.

Similarly, as we turn to 2018, there will be substantial changes to generally accepted accounting principles, GAAP, specifically the revenue recognition standard. It is important to know and understand its many implications changing reporting and auditing.

Below are some of the significant attributes that are included in the new standard:

  • The standard applies to companies that have contracts with customers, regardless of industry
  • Transaction price is made up of both fixed and variable consideration; each performance obligation is allocated a portion of the transaction price
  • Revenue recognition occurs once/as an entity satisfies each performance obligation
  • Incremental costs of obtaining a contract are capitalized if certain criteria are met

Below are certain business and financial issues private equity funds and their portfolio companies should consider:

  • Definition of EBITDA in an exit – old rules or new rules
  • Definition of EBITDA for current lender covenant calculations or transaction earn outs
  • Redesign of contract terms to optimize the recognition of revenue under the new rules during ownership period
  • Definition of working capital

To learn more about the new revenue recognition standard and how CBIZ CMF can help you navigate through issues and efficiently implement the provisions click here.

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