What CEOs must know about New Standards for Revenue Recognition

Revenue Recognition Principles as Promulgated in 2013

By Derek A. Smith, Managing Director, Next Stage Solutions, Inc. He is a CPA and Chartered Accountant and was a member of the AICPA Board of Examiners from 1998 to 2006.  The BOE sets the CPA examination. Contact: smith@nextstagesolutions.com

Major Changes to Consider The New Standard in 5 Steps
  • Affects both Public and Private companies

  • Must run parallel accounting systems for at least 2 years( private companies) and 3 years (public companies)

  • New standard is Principled based not Rules based

  • There is an opportunity for Judgment

  1. There must be a contract (either oral or written) with the customer
  2. The contract must spell out the separate performance obligations;
  3. The transaction price must be determinable;
  4. The transaction price must be allocatable to the separate performance obligations in the contract; and
  5. Individual performance obligation revenue will be recognized upon satisfaction of the individual performance obligation.

The Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) have at long last completed their deliberations on the establishment of revenue recognition principles that are common wherever US GAAP and International Financial Reporting Standards (“IFRS”) are applied. The new standard will most likely be published in the second quarter of 2013. The new standard will be effective for fiscal years beginning after December 15, 2016 for public companies and December 15, 2017 for private companies. Entities will have the option to apply the standard retrospectively or to adjust opening retained earnings for the cumulative effect of accounting for contracts that are not completed under legacy GAAP at the adoption date.

Under US GAAP today there are at least eight different sources for determining how to account for revenue (for example ASC 985-605, Software: Revenue Recognition; ASC 605-35, Revenue Recognition: Construction-Type and Production-Type Contracts; and ASC 932-605 Extractive Activities – Oil and Gas: Revenue Recognition). These will all be replaced by the new standard.

Why you want to start sooner rather than later

While the launch date may seem far off, companies and their management teams need to understand that systems and processes are going to need adjustment to satisfy the
new guidelines. It is not appropriate to use an Excel spreadsheet to track the reporting obligations. Further, for any company that provides comparative financial statements, the results for the earlier periods will need to be recalibrated if the company applies the standard retrospectively. Public companies have to provide three years of comparative Statements of Activities.

What is the New Standard?

The core principle of the new standard is that “an entity shall recognize revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services”. While there are some exceptions, the standard will apply to most transactions with customers.

The New Standard in 5 Steps

The new standard has five steps an entity must take in determining the recognition of revenue. They are as follows:

  1. There must be a contract (either oral or written) with the customer;
  2. The contract must spell out the separate performance obligations;
  3. The transaction price must be determinable;
  4. The transaction price must be allocatable to the separate performance obligations in the contract;
  5. Individual performance obligation revenue will be recognized upon satisfaction of the individual performance obligation.

1. Contract with a Customer

A contract must have commercial substance; the parties are committed to perform their respective obligations; each of the parties can identify their rights regarding the goods or services to be transferred; and the entity providing the goods or services can identify the payment terms for effecting the transfer. The standard addresses contract modifications and add-on obligations.

2. Separate Performance Obligations

The final standard will provide specific guidance on evaluating the goods and services in a contract to identify each separate performance obligation. While the final standard will not define goods or services, it will provide several examples including goods produced for sale, granting a license, and performing contractual acts. A good or service will represent a separate performance obligation if it meets both of the following criteria:

(i) It is capable of being distinct (that is, the customer can benefit from the good or service on its own or with other readily available resources); and

(ii) It is distinct in the context of the contract (that is, it is not highly dependent or highly interrelated with other promised goods or services).

The final standard will include other indicators (or similar indicators) of whether a good or service is distinct in the context of the contract.

3. Transaction Price

The third step in applying the new standard is to determine the transaction price. That is, an entity must determine the amount of consideration to which it expects to be entitled in exchange for the promised goods or services in the contract. The transaction price can be a fixed amount or can vary because of discounts, rebates, refunds, credits, incentives, performance bonuses/penalties, contingencies, price concessions, outcome-based fees, or other similar items. Under this model, an entity would estimate the transaction price by considering the effect of variable consideration, the time value of money (if a significant financing component is deemed to exist), noncash consideration, and consideration payable to the customer. Entities would use a probability-weighted approach to estimate a transaction price that is subject to variability (expected value) or an approach based on the single most likely amount, whichever is more predictive of the amount to which the entity would be entitled.

Note: Contingent consideration would only be included in the transaction price when an entity has a “high level of certainty” that the amount of revenue to be recognized would not be subject to future reversals.

4. Allocating the Transaction Price

Next, the entity must allocate the transaction price to the separate performance obligations. When a contract contains more than one separate performance obligation, an entity would allocate the transaction price to each separate performance obligation on a relative stand-alone selling price basis (with certain limited exceptions). The standard will note that the best evidence of stand-alone selling price is the price at which the good or service is sold separately by the entity. If the good or service is not sold separately, an entity will be required to estimate it by using an approach that maximizes the use of observable inputs. Acceptable estimation methods will include, but are not limited to, expected cost plus a margin, adjusted market assessment, and a residual approach (when the selling price is highly variable or uncertain)

5. Recognition of Revenue

The fifth and final step in the model is to recognize revenue when (or as) each separate performance obligation is satisfied. A performance obligation is deemed satisfied when control of the underlying goods or services (the “assets”) for the particular performance obligation is transferred to the customer. “Control” is defined under the proposed model as “the ability to direct the use of and obtain substantially all of the remaining benefits from the asset” underlying the good or service. In applying the proposed model, an entity will first evaluate whether control of a good or service is transferred over time. A performance obligation is deemed to be satisfied over time (i.e., control of the good or service is transferred over time) when at least one of the following is met:

The entity’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.

The customer receives and consumes the benefits of the entity’s performance as the entity performs, and another entity would not need to substantially re-perform the work the entity has completed to date.

The entity’s performance does not create an asset with an alternative use to the entity and the entity has a “right to payment for performance completed to date.”

If any of the criteria are met, an entity would be required to recognize revenue over time as control of the goods or services is transferred to the customer. In such case, an entity would recognize revenue by measuring progress toward satisfying the performance obligation in a manner that best depicts the transfer of goods or services to the customer. The standard will provide specific guidance on measuring progress toward completion, including the use and application of output and input methods.

Note: There is no reference to collectability of the revenue as currently exists in US GAAP. While there has to be a reasonable expectation of collectability the new standard does not impose a threshold such as “reasonably assured”. The standard setters have stated that any provision for bad debts must be prominently disclosed within operating expenses.

Other Considerations

As with any new standard, there are other items to consider in implementing the standard. They include the required disclosures to be included in the financial statements (hint: they are onerous), and for US companies the impact on accounting for income tax obligations. For example, the Internal Revenue Code addresses advance payments for goods and services and income from long-term contracts. Entities will need to evaluate how the new revenue recognition principles reconcile with income for tax purposes.

Next Steps

Discuss this issue and potential opportunity with your CFO at your earliest convenience.  For further information, please don’t hesitate to contact your Next Stage Solutions partner. It is not too soon to begin addressing the accounting and operational processes required to be modified to be in compliance with the new standard.

To CFO or not to CFO? Better Invest Now!

By Rudi Scheiber-Kurtz, CEO of Next Stage Solutions, Inc, a leading on-demand financial management advisory firm.

Are you tired of reading about the economy, the uncertainty, the election, Greece and the possible fall of the Euro when all you want to do is grow your business?

So many uncertainties and yet how do you calculate them into your forecasts? To CFO or not to CFO is firstly about whether you make the choice, or not, to work with a CFO and secondly, how to augment the missing expertise or skill set to work with your trusted CFO and/or Controller so not to harm sustainability and growth. Believe it or not, the right CFO can make all the difference. In this article we give you ideas and a checklist how to identify CFO capabilities that stretch way beyond the conventional CFO boundaries. We will explore ways to access or augment expertise without compromise.

Let us take a few minutes to explain why a CFO is so important to your growth and why you should invest in such a solution! What do your current finance functions look like?

Are any of the above people your partner who can offload some of your responsibilities so you can spend time ON the business? Do you gather information and problem solve 24/7 and have to make all the decisions on your own? Does the finance staff even have the time to work ON the business with you and what might be the barriers to your growth?

You see, with the right CFO you can actually delegate important executive level tasks. Controllers are very important in that they keep you compliant, give you the financial, monthly reports, take care of payroll and reconcile your bank statements, important but mostly tactical. The VP of Finance oversees the tactical side and provides administrative and HR support.

Let’s discuss the other side of finance, the strategic, forward–looking and value creating aspects of finance. Here are some examples of what your Accountant, Controller or VP of Finance do not do or help you with, but the CFO will:

The list above exemplifies what a cross-functional, modern CFO must bring to the table and where small and medium size companies make the biggest concession in hiring a ‘Jack of all Trades’ or one person who can do it all. They can’t, it is that simple. For them, a part-time team solution involving a CFO, Controller and Accountant is appropriate. To maintain sustainability or achieve growth, especially in a sluggish economy, you must consider alternative resources appropriate to your stage and size of company. You want to have most of the above items checked to eliminate business performance gaps.

Think about your strategy, expectations and goals and how you are going to achieve them before you go out and start a search for a CFO or Controller. Consider the next level of financial sophistication to meet your objectives and goals so that the value-driven support benefits your business growth and increases your valuation.

So often we see CEOs struggling with this issue of what the CFO should bring to the table and what a Controller takes care of.  Should they be strategic? Why are they not interested in your vision? Why do they never have the time?

The reasons vary by business, often we see that the CFO has to oversee all finance functions and is simply bogged down with all the daily, transactional tasks. The CFO should help you grow the business in a sustainable manner.  If s/he spends time working on monthly reports, then you are compromising and overpaying, because that is Controller work. In fact, a team will bring you more bang for the buck than one person who will accomplish some of the tasks some of the time. You may also consider augmenting the current CFO’s tasks or skill set with a consultant who can provide you the additional expertise needed to move your business forward. Frankly, no CFO knows everything in today’s complex business world, so budget for extra support to access the needed expertise.

In the table below we have identified key questions and expectations you want to set when searching for a CFO or identifying the resources gap between what you have and what you need.  Again, when the CFO is allowed to focus on the value drivers of the business, the results are value creation driven.  It takes soft skills to successfully achieve the hard skills. Communications is an important attribute and soft skill for a CFO to have, since the metrics and expectations (hard skills) you set for the employees are relationship based and require buy-in from all employees to succeed.

Once you create this gap analysis you will want to consider how to augment the missing capabilities. Let’s say you are a company with under $20M in revenue. You can rarely justify a fulltime CFO. The team approach to finance including a part-time CFO, Controller and Accountant is very effective. CFO Turnover is still close to 18 months and ends up a very costly event for a business. Think hiring bonuses, severance pay and more.  The CFO you have currently may no longer have the right skill set, especially since you want to double your growth over the next three years. Often s/he has become your trusted advisor but you easily can eliminate business performance gaps with a consultant.  A CFO Consultant is often better positioned to provide you frank and objective feedback on issues and problems that need fixing, whereas a fulltime employee might be more cautious.

Yes, it is a paradigm shift in how we think about the finance function and how much to expect from them. On the other hand, how we conduct business today has also shifted and gotten more complex. Tomorrow’s companies need to be agile and fast in making changes and corrections on the fly.

To CFO or not to CFO is an important decision to make for you and having the right CFO and finance function is where a profound difference will break down the barriers to growth. Take action today, evaluate your finance team, perform a gap analysis, budget for the appropriate resources and make the necessary corrections sooner than later.

Next Stage Solution benefits its clients because we set very high expectations for the CFO role, the FUTURECFO™, who brings the GPS of Finance™ tools and methodologies to the discussion. Our CFOs understand how to parse out the financial responsibilities so that you benefit from a strong compliance side with a Controller, to the business insights, metrics and growth opportunities from the CFO.  Our team approach gives you seamless support when you need it with capital efficiency and highest productivity. And no, you will not find our CFOs or Controllers doing Sudoku in their office!

With our assessment tools, we help eliminate business performance gaps and define the right finance functions for you. We’ll have a conversation about how to reach your aspirations and solve the upcoming challenges.

Take action today and give us a call at 617-449-7728 or contact me directly at scheiberkurtz@nexstagesolutions.com | http://www.nextstagesolutions.com

Articles of Interest Related to the FUTURECFO™:

For CFOs, A Move Past Finance – Wall Street Journal | July 31, 2012

As your Business Grows, don’t hesitate to hire a CFO – The Globe and Mail | June 18, 2012

Where Finance Efficiency meets Business Insight – 2010 IBM Global CFO Study: Where Finance Efficiency meets Business Insights | March 6, 2012

Moving from CA to CFO – A Competency Framework | Queen’s University | 2010

Gain Access to Capital Markets

Join us for our next CEO Workshop

“How to Gain Access to Capital Markets”

Thursday, Nov 17, 2011 from 7:30am to 9:30am

Register Today!

According to our recent Annual CEO Survey, the biggest challenge for CEOs is getting access to capital markets and how to maintain liquidity in a volatile economy.

In response to this urgent challenge, the upcoming workshop will explore two areas:

  1. How to organically manage your cash flow
  2. Hear first hand from Key Lenders how to access capital

The exceptional line up of Key Lenders will share how to optimally pursue debt and/or equity financing in a fragile economy.

Learn from these Key Lenders:

  • Who is lending?
  • What industries and why?
  • How can you make your company more attractive to lenders?
  • What NOT to do and why?

Join us for this important panel to discuss the current credit market climate for early stage, growth and middle market companies.

M&A Guidelines Benchmark Report

M&A activities are picking up?  How should you prepare?  NSS conducted a survey last year with a diverse group of M&A EXPERTS about the internal and external approach a business needs to consider to end up with a successful exit.

By Rudi Scheiber-Kurtz, CEO of Next Stage Solutions. Inc.

Growing a company takes all the energy of a CEO and Exit Planning is mostly on the periphery.  Developing a long-term approach is essential in achieving a successful exit.  This will be the biggest game you will ever play and you want the end result to reflect that.  With this survey summary we want to showcase the necessary steps for you to consider.  Mitigate risk up front and consider early on an advisory team.

The EXPERT survey takers included prominent Investment Bankers, M&A Advisors, Attorneys, CPAs and Financial Advisors|CFO, Valuation and Management Consultants from the greater Boston area.

The summary and Benchmark Report represents the overall sentiment from the EXPERTS. Click to get the report: M&A Guidelines 2011

A CEO Survey to gain trigger points for action

Are you a CEO or  President of a company? If so, take this survey and be done in less than 4 minutes!!

We want your participation in our Annual NSS CEO Survey. The survey is anonymous, so your privacy is completely protected. The information collected from this survey will be aggregated and only the collective data will be shared.

We are conducting this survey to better understand how you view the current and future state of your organization and what is of importance to your company in moving forward.

We have experienced one of the worst economic cycles in the nation’s history.  From today’s afflictions to tomorrow’s aspirations, the annual NSS CEO survey presents a number of options that will contribute to overcoming challenges. Rank what priorities you think are most important and then find out what your peers are thinking.

How will you prioritize the next steps for your organization?

Within the framework of present state, future state, challenges and resources, please review and rank the following questions. It is a forced rating, meaning that we ask you to choose from most to least.

To take our survey, please go to:  http://www.surveymonkey.com/s/NLHHBP2

Next Stage Solutions, Inc. 2011- Proprietary & Confidential

How do you communicate and manage the goals for your team?

On May 11, 2011, NSS held a CEO Workshop concerning Budgeting and Forecasting.  The group discussed the different measurement criteria, value drivers and how to lead an ongoing budget process within your business. Flexible budgets, annual budgets and rolling forecasts were compared.  Here are two articles you may want to read that are relevant to this topic.

Contact Ben Weller, BD & CFO of NSS at weller@nextstagesolutions.com or call at 617-449-7728 ext. 710 for a consultation.

  1. Let It Roll: Why more companies are abandoning budgets in favor of rolling forecasts by Russ Bangham of CFO Magazine, May 2011
  2. Use a Rolling Forecast to Spot Trends by Harvard Business School Working Knowledge, March 13, 2006

Budgets and Forecasts represent two parts of a business management continuous improvement process. A successful enterprise must first have a clear understanding of its strategic plan. In fact Budgets and Forecasts are the financial GPS tools that carry strategy through to implementation.

How do you communicate and manage the goals for your team?

The workshop posed the following questions to our CEO participants;

  • Do you see a budget as a Strategic or a Tactical tool?
  • How can your budget reflect your strategy?
  • Do you see your budget as more of a tactical tool, i.e. the performance yardstick for annual goals and compensation plans?
  • Is the budget made up of strictly financial metrics?
  • Where do you capture operational goals and performance measurement metrics?
  • Is your budget implementation process a reflection of your company’s culture or is it a process within itself?
  • Do you recognize your business and industry drivers within your budget?
  • Does your budget have an expiration date, or do you keep it alive through continuous improvement forecasting?

Ben Weller, BD & CFO for Next Stage Solutions compiled the following check list as a hand out:

The measure of how you execute strategy is captured in the topic of Budget. But different areas of your business require different measurement criteria.

Budgets can refer to:

  • Marketing Strategies
  • Sales Plans
  • Operational performance
  • Human Resource development
  • Capital Investment
  • Financing Strategy
  • Ownership Return

And can take on many measurement dimensions

  • Fiscal
  • Continuous Improvement goals
  • Key Performance indicators
  • Strategic Planning Milestones
  • Benchmarked Metrics
  • Customer Satisfaction

Budget Implementations can take on the personality of the organization

  • Size of Company and distribution of authority
  • Top Down versus bottom up management style
  • Fiscal Micro management vs  Strategical Macro management
  • Cash Flow is Primary Focus
  • Performance vs External Expectations is a Priority

And all methods and uses need to focus on Business Drivers

  • Variable Sales and Cost (Marginal Profitability)
  • Fixed Costs
  • Project Costs (New Product Introduction)
  • Occupancy Costs
  • Variable Energy Costs
  • Headcount
  • Average Selling Prices (Competitive Positioning)
  • Efficiency (Labor and Machine Operations)
  • Productivity

What Profiles of budget design fit with various industries

  • Software
  • Life Science
  • Medical Device
  • Manufacturing
  • Food Production
  • Professional Services

What are the various focuses of forecasting and where do they apply

  • Traditional Rolling 12 Month forecast
  • Sales Driven Top down vs trend based
  • Cash Flow vs P&L
  • Analysis vs Plan
  • Current State vs Future State (This involves lean accounting and is a whole other topic)

If you are interested in this topic and would like to explore rolling forecasts further for your business, NSS provided a customized one-day workshop.

Contact Ben Weller, BD & CFO of NSS at weller@nextstagesolutions.com or call at 617-449-7728 ext. 710

HIRE Tax Breaks Supporting the Recovery

By Lauriston Taylor, Controller Consultant, Next Stage Solutions, Inc. (NSS)


The IRS has implemented two new tax breaks under the HIRE (Hiring Incentives to Restore Employment Act) program that will provide new incentives for employers to stimulate their staffing efforts.  Employers may qualify for the following two tax exemptions:

  1. Payroll tax: 6.2 percent payroll exemption of social security tax on wages, effective dates are 2 February 2010 through 31 December 2010.
  2. New Hire Retention credit: $1,000 per additional new worker that is retained for at least one year with no significant wage reductions during the later part of the year

Qualified Employees:

Those employees beginning employment after 3 February 2010 and before 1 January 2010 for a period of 60 days have been previously unemployed or worked 40 hours or less.  The following situations will qualify:

–  hiring a replacement for an existing position that has become vacant due to termination for cause or voluntary resignation

–  staffing of a new company and its initial staff

–  hiring for public colleges and universities


The staffing additions listed below will not qualify:

– State, local and federal positions

– House hold employers

– Independent contractors

– Employees who are related to the employer or who directly or indirectly own more than 50 percent of the business


The new hire should supply a signed Form W-11 and this should be kept on file for record keeping purposes.

Additional information:

For further details please refer to the IRS website

Form W-11 can be downloaded from this link