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Revenue recognition transition adoption Options- Full or modified retrospective?

Posted on May 10th, 2017 by Sanjit Anand ||Email This Post Email This Post

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The deadline for adoption of the new revenue recognition standards under ASC606 is fast approaching.

Public companies need to adopt for fiscal years beginning in 2018 while private companies have until 2019.

The changes in how to account for software and services can be significant, often requiring the break out of underlying performance elements that were bundled together under current reporting standards.

The guidance lays out two alternatives for disclosing the revenue recognition transition , both of which require dual accounting to support the disclosure requirements.

  • Full retrospective
    • Under the full retrospective approach, the full prior two years of financials are restated to the new standards to provide an apples to apples comparison between the years under the new standards.
  • Modified retrospective
    • The modified retrospective approach does not require restatement of prior years but requires disclosure of the year of adoption financials under the old standards to provide the apples to apples comparison under the old standard

Full retrospective

Under the full retrospective approach, the sooner that a multi-book solution can be implemented, the better.

A multi-book approach accounts for new contracts under both standards.

In a perfect world, implementing this type of dual accounting at the beginning of the retrospective period would be ideal, but most companies will need to perform recast calculations on some period of contracts.

The full retrospective also requires two points to calculate a cumulative adjustment.

First, a cumulative adjustment will need to be performed at the beginning of the retrospective period and then again at the date of adoption to adjust the company’s primary books to the new standards as per below diagram.

606 Full Retrospective

Modified retrospective

The modified retrospective is a bit simpler in that it only requires one cumulative adjustment of open contracts as of the date of adoption and only requires the cumulative impact calculation of open contracts vs the period by period recast required to support a full retrospective.

Usually it recommend establishing a multi-book strategy two purposes as below :

modified approach

  • First, the establishment of a legacy GAAP standard book will provide the accounting for the comparative disclosure during the year of adoption.
  • Secondly, the establishment of an ASC606 book reflecting the new standards. This book will assist with calculating the cumulative adjustment as well as providing visibility to accounting differences between the old and new standards leading up to the year of adoption.

High Points and Low points in two Options

Let’s take a quick look for highpoints and low points for each approach, and offer a few reasons why a company might choose one over the other.


Full Retrospective Modified Retrospective
  • Sstakeholders and/or shareholders may demand it
  • Useful trend information can be had across all the period presented on your financials
  • This must recast previous financial statements as if the new guidance had always existed for a comparative two-year period prior to the adoption year
  • It’s likely to require significant time and effort
  • If contract volume exceeds even a handful, then finance and accounting automation beyond that provided by Excel spreadsheets will be a necessity
  • Reduced effort in restating prior year amounts
  • No recasting of past revenue can speed implementation
  • Potential for “lost revenue” if the new guidance recognizes less revenue than the previous method would have in a particular period
  • Requires you to keep two sets of accounting records in the year of adoption in order to comply with the requirement to disclose all line items in the financial statements as if they were prepared under today’s guidance
  • Here too, even a modest number of contracts will demand more accounting and finance automation than Excel spreadsheets can reasonably provide

Therefore , regardless of the which method is choosen to disclose revenue recognition transition, there will be a significant effort which need to assess properly .These options include considerations for historical data restating requirements and overall data volume requirements. Discuss and engage your Implemenation partner to plan for this transition and deploy technologies to support these new requirements.

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