Fall / Winter 2016-2017 | BWD 19
Under the new standard , revenue is recognized when control of a good or service is transferred to the customer . Depending on several factors , control may be transferred when the contract is complete or it may be transferred gradually over the life of a contract .
In some cases , the new standard ’ s “ transfer-of-control ” model may require you to accelerate revenue from advance payments into the year they ’ re received . If this happens , taxable income related to those payments will similarly be accelerated .
Percentage-of-completion method . With certain exceptions , the tax code requires contractors to account for long-term contracts using the percentage-of-completion method . But the new standard may require adjustments to that treatment for financial reporting purposes .
If the tax and financial reporting treatments diverge , applying the new standard may create a book vs . tax income difference ( or alter an existing book-tax difference ) that must be tracked and reported on your tax returns .
Changes in tax accounting methods . If the new standard requires you to change an accounting method for financial reporting purposes , it may be necessary or desirable to make a similar change to the corresponding tax accounting method . Changing a tax accounting method requires you to file Form 3115 , “ Application for Change in Accounting Method .” Depending on the nature of the change , approval may be automatic or it may require advance consent from the IRS .
System changes . As just described , adoption of the new revenue recognition standard may cause you to change your tax accounting methods , or it may create ( or alter ) differences between book and tax income . Either way , you must ensure that you have updated systems , policies , processes and controls in place in order to gather the data you need for both financial and tax reporting and to track any book-tax differences . ( Our colleagues Magdalena and Stephen addressed this in the fourth step of the plan they shared on page 17 .)
If you fail to prepare … We ’ re reminded of the adage , “ If you fail to prepare , you prepare to fail .” Although it ’ s as old as the hills , that saying certainly applies to the new revenue recognition standard . Don ’ t wait to take a deeper dive into what this means for your tax returns and financial statements — lay out the groundwork your company needs today to successfully address revenue recognition tomorrow .
Start today
The new revenue recognition standard will have an impact on essentially every company . Organizations should begin now by becoming familiar with the new standard , assessing the rules on specific issues that impact them , and implementing an effective and efficient plan . Contact your Rehmann advisor or call 866.799.9580 .
ABOUT THE AUTHORS
Carol is a Tax Principal at Rehmann . She has more than 30 years of experience in both public and private accounting . She advises a wide range of middle-market businesses on tax planning , business transactions and operational issues . Contact her today at carol . wright @ rehmann . com .
Liesl is a Senior Tax Manager with Rehmann . She assists businesses and individuals with tax compliance and reporting obligations and provides tax consulting and planning services . Contact her today at liesl . morelli @ rehmann . com .