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The New Revenue Accounting Standard: Major Impacts On Business Valuation

Originally Published in The Value Examiner, January / February 2020

By: Michael Pakter, CPA, CFF, CGMA, CVA, MAFF, CA, CIRA, CDBV, et al
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The purpose of this article is to introduce the reader to the new Revenue Recognition Accounting Standard (the Standard) issued jointly by the U.S. Financial Accounting Standards Board (FASB) and the UK-based International Accounting Standards Board (IASB) and to consider the Standard’s impact on financial analyses prepared by practitioners performing business valuation engagements. A future article will explore the Standard’s impact on economic damages engagements.

The Standard is now part of U.S. and international financial reporting standards (U.S. GAAP and IFRS, respectively, and GAAP collectively). All reporting companies—both public and private—are now required to have implemented the Standard pursuant to the staggered implementation dates (see below).

Business valuations are performed formally or informally in several settings for a variety of purposes. These include financial reporting under GAAP, and in connection with lending activities, buy-sell agreements, estate planning, mergers and acquisitions, litigation matters—such as shareholder disputes and matrimonial dissolution proceedings—and turnaround and reorganization work.

Because most of the essential business valuation analyses begin with revenues,1 obtaining a complete and detailed understanding of the revenues of a business enterprise or comparable company is essential to performing and properly completing a business valuation.

This article:

  • Summarizes the standard,
  • Analyzes the Standard’s impact on financial analyses customarily performed in connection with business valuation engagements, and
  • Discusses the factors to be considered by practitioners when completing their engagements due to the potential impact of the noncomparability of revenue-related data.

The Amended Statndard

On May 28, 2014, the FASB and IASB each issued an amended accounting standard entitled Revenue from Contracts with Customers.2 This joint Standard represents the most transformational change to U.S. and international GAAP since each of the two frameworks were originally established.

In its entirety, ASU 2014-09, as originally issued, is a staggering 706 pages in length. The amendments contained in the Standard affect virtually every aspect of how a seller measures the amount of revenue it will recognize, the period or periods during which the revenue will be recognized, the disclosures the seller is required to include in its interim and annual financial statements and even the unit of accounting to be used to account for revenue.

The Standard applies to all publicly traded and privately held businesses and not-for-profit organizations. The only entities that are exempt from the new provisions are state and local governmental entities that use, as their accounting framework, the accounting standards issued by the Governmental Accounting Standards Board (GASB) or, in the U.S., the accounting standards issued by the Federal Accounting Standards Advisory Board (FASAB) that apply to federal entities.3

One aspect of the Standard that likely will be unfamiliar to users of U.S. GAAP is the fact that it is industry agnostic. Unlike legacy GAAP, which contains prescriptive rules that apply to transactions in various specialized industries, amended GAAP is based on the premise, common in IFRS, that the industry in which an entity operates should not influence the portrayal of its revenues in its financial statements. Thus, the new revenue recognition model is intended to be universally applied in all industries regardless of whether there were formerly specialized carve-outs or industry-specific rules.4

Immediately following the issuance of the Standard, FASB and IASB (the Boards) formed a joint Transition Resource Group (TRG) to perform outreach during the implementation period and to identify operational difficulties or areas where the Standard may be ambiguous or confusing. While the TRG meeting minutes are published and available to stakeholders, the results of TRG deliberations are not intended to be viewed as authoritative standards.5

Per ASC 606-10-65, as amended to incorporate the one-year deferral provided by ASU 2015-14, the effective dates on which the new Standard was required to be implemented are as follows:

Download PDF version to view tables and references...

Michael D. PakterCPA, CFF, CGMA, CFE, CVA, MAFF, CA, CIRA, CDBV, has more than 40 years of experience in accounting and forensic accounting, business economics and investigations in numerous industries and diverse engagements, including more than 20 years of experience in economic damages and business valuations. He has submitted expert reports in several jurisdictions and testified in arbitrations, regulatory proceedings and litigated disputes. State, Federal and Bankruptcy Courts, as well as arbitral bodies, have recognized him as an expert in accounting, financial analysis, forensic accounting, economic damages, business valuation and business economics.

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