Revenue recognition is one of the most critical aspects of business accounting. It determines when and how companies record revenue in their financial statements, directly impacting profitability, compliance, and investor confidence.
With the implementation of the new revenue recognition standards under ASC 606 and IFRS 15, businesses must adopt a consistent, principles-based framework for recognizing revenue across industries. These standards can be complex, especially for businesses that operate with multiple performance obligations or long-term contracts.
Remaining compliant under these new standards while safeguarding your business’s financial well-being requires thorough knowledge and effective strategies. MKS&H’s years of experience guiding businesses through ever-changing legal landscapes have allowed us to develop such strategies based on our deep understanding of accounting and business operations. In this article, we will break down how the new standards impact revenue recognition and outline actionable steps to help you adapt effectively.
Why Revenue Recognition Matters for Business Owners
Revenue recognition is more than just an accounting procedure—it is a reflection of your company’s financial health and operational transparency. For business owners like you, proper revenue recognition ensures that income statements accurately represent performance, which is crucial for stakeholders, lenders, and potential investors.
Failing to correctly implement revenue recognition can lead to misstated financials, penalties, or even loss of credibility. The new standards that you are expected to follow emphasize a uniform approach across industries, reducing inconsistencies and improving comparability between businesses. This shift is especially significant if your business operates under a subscription-based model, performs construction projects, or bundles products and services.
Understanding the timing and criteria for revenue recognition will help you align your financial practices with long-term growth strategies. And your compliance will allow you to leverage accurate financial reporting and make data-driven business decisions that add to your competitive edge.
Overview of the New Revenue Recognition Standards
The new revenue recognition standards, ASC 606 and IFRS 15, both introduced a five-step revenue recognition process to improve accuracy and consistency. These steps are:
- Identifying the contract with the customer
- Pinpointing performance obligations in the contract
- Determining the transaction price
- Allocating the transaction price to the performance obligations
- And recognizing revenue only when performance obligations are satisfied
The goal is to eliminate industry-specific inconsistencies by creating a unified system. While the principles may sound straightforward, their application often becomes complex, especially when dealing with variable considerations, discounts, or bundled goods and services.
As a business owner, you must carefully assess each contract to determine when and how revenue should be recognized. For example, a software company selling licenses with ongoing customer support must separate the license from the support and recognize revenue accordingly.
Challenges Businesses Face with Implementation
Due to the complexities these new standards introduce, implementing ASC 606 and IFRS 15 can be a demanding process. Even companies with strong accounting practices often find themselves facing hurdles they did not anticipate. Some of the most common roadblocks include:
Identifying Performance Obligations
Many businesses struggle with properly identifying and separating performance obligations within a single contract. For example, when a contract includes bundled goods and services, it can be unclear whether these should be accounted for together or separately. Misidentification can lead to misstated revenue recognition timelines, which may have significant financial reporting consequences.
Determining the Transaction Price
Establishing the correct transaction price can be especially challenging when variable considerations come into play. Discounts, rebates, bonuses, or penalties tied to performance can make it difficult to predict the final amount of revenue to recognize. Businesses must use judgment and historical data to estimate these amounts, which increases the risk of error if assumptions are not carefully monitored and updated.
Adjusting Processes and Systems
Implementing the new standards often requires broad operational changes. Companies may need to update their accounting systems, strengthen internal controls, or even overhaul how data flows between departments. For organizations with complex contract structures or outdated technology, this transition can be both time-consuming and costly. Additionally, aligning these processes with both internal management reporting and external compliance requirements adds another layer of complexity.
Training and Change Management
Ensuring that staff understand and consistently apply the five-step model is a critical component of compliance. However, training is rarely straightforward. Teams across finance, sales, operations, and legal must all be aligned on how contracts are structured and accounted for. Without strong change management strategies, knowledge gaps and inconsistent applications of the rules can emerge, creating significant compliance risks.
Communication with Stakeholders
Beyond internal implementation, businesses must also manage how the new standards affect communication with external stakeholders. Revenue recognition changes may impact reported earnings, performance metrics, and even contractual negotiations with customers and investors. Failing to clearly communicate these shifts can lead to confusion and even a loss of stakeholder trust.
Without careful implementation of these new standards, you leave yourself vulnerable to regulatory penalties, costly missteps, and strained investor relationships. While these challenges may seem daunting, proactive planning and relying on an experienced accounting firm like MKS&H can help you minimize risks and ensure compliance.
Actionable Steps for Business Owners
Successfully adapting to ASC 606 and IFRS 15 is about more than compliance—it’s about reshaping how your business understands, records, and communicates revenue. Let’s explore some strategies that can make the transition easier for you and your business.
Start with a Revenue Recognition Roadmap
Before diving into technical adjustments, you need a big-picture plan. A revenue recognition roadmap sets priorities and creates a realistic timeline for implementation. This may involve you deciding to tackle high-value contracts first or focusing on areas where compliance risk is the greatest. However you begin the transition process, taking a strategic approach allows you to allocate resources where they’ll make the most impact, rather than spreading your team too thin.
Your roadmap should also define ownership. Who’s responsible for contract review? Who oversees system changes? Without clear accountability, implementation often stalls. By setting milestones and assigning roles up front, you’ll avoid costly delays and confusion down the line.
Conduct a Contract Inventory and Standardization
Instead of approaching contracts one by one, gather all active agreements into a centralized inventory. This gives you a comprehensive view of how obligations, pricing terms, and renewal clauses are structured. Once you have this inventory, you can identify common contract patterns—like bundled services, subscription models, or milestone-based payments—that require consistent accounting treatment.
Standardization is also important. Many businesses discover that different departments or even different sales reps draft contracts in slightly different ways. This inconsistency makes compliance unnecessarily challenging. By creating standardized templates and approval processes, you will reduce variability and make revenue recognition much more predictable.
Strengthen Cross-Department Collaboration
Revenue recognition is influenced by how contracts are sold, negotiated, and delivered within your company. For instance, if you have a sales rep who promises a customer bundled services, it creates complex performance obligations that will cost you time and money when your accounting team has to determine correct revenue recognition. You can minimize these types of complications by facilitating interdepartmental collaboration.
To keep departments on the same page, consider creating a cross-functional revenue recognition team to help break down silos. It is also recommended to hold regular meetings to ensure that everyone is aligned on how contracts are to be written and tracked. When departments collaborate early in the process, you minimize the risk of missteps and encourage decisions to be made with compliance in mind from the start.
Build Scalable Policies
A common mistake is to address issues as they occur—for example, creating a one-off adjustment for a single contract. While this might solve an immediate problem, it doesn’t prepare your business for growth. Instead, aim to build policies that apply across your business so that future contracts are structured to work within your established framework.
One example would be to establish a policy that defines how discounts are split across deliverables. This ensures that every contract is handled consistently, reducing errors and saving time as your business scales. Scalable policies also make audits go more smoothly by demonstrating that your business has a systemic approach to contracts instead of relying on patchwork fixes.
Invest in Smart Technology Integration
Revenue recognition under the new standards involves detailed calculations, multiple data points, and careful tracking over time. Relying on spreadsheets alone is risky and inefficient. Instead, consider investing in accounting software that integrates directly with your CRM and contract management system. This integration reduces the chance of errors from manual data input.
Technology can also provide real-time insights. For example, automated dashboards can show how much revenue has been recognized versus deferred at any point in time. This not only helps with compliance but also improves business decision-making by giving you more accurate financial projections. Integration should be viewed as an investment in both compliance and long-term efficiency.
Provide Ongoing Training and Refreshers
Once your team is trained on the new standards, the job isn’t over. Revenue recognition rules involve judgment and interpretation, which means regular refreshers are necessary to ensure consistency. Employees may also leave or change roles, creating knowledge gaps that need to be addressed quickly.
Training should go beyond theory. Real-life case studies from your own contracts can be used to walk through scenarios and show staff exactly how policies should be applied. These sessions also provide opportunities for employees to raise questions and flag challenges they encounter in day-to-day work, which can then be addressed before they become reporting issues.
Prepare for Audits
Auditors will closely examine how contracts are structured, how performance obligations are identified, and whether revenue is recognized in line with the standards. If you lack clear documentation or well-defined processes, you may face delays and increased scrutiny.
Preparing for an audit begins with maintaining detailed records of contracts, judgments made in applying the five-step model, and any estimates used for variable consideration. Internal controls must also be updated to reflect the new requirements, and staff should be trained to answer auditor inquiries with confidence. Technology solutions can further support audit readiness by providing transparent, automated records of revenue recognition processes.
At MKS&H, we help businesses proactively prepare for audits by reviewing policies, conducting pre-audit assessments, and ensuring documentation aligns with both compliance requirements and best practices. This proactive approach not only simplifies the audit process but also strengthens stakeholder confidence in the company’s financial integrity.
Partner with Experienced Advisors
Even with strong internal systems, outside expertise adds an invaluable layer of assurance. An accounting firm like MKS&H can guide you through every stage of implementing the new revenue recognition standards, so you’re not left to navigate the process alone.
Our team brings proven strategies and deep industry knowledge gained from years of helping business owners across diverse industries. By leveraging our expertise, you not only strengthen compliance but also create growth opportunities.
MKS&H offers tailored business consulting to help you map a clear path toward successful implementation, along with comprehensive audit and accounting services to ensure your financial reporting fully aligns with the new standards. This means you’ll be compliant today—and ready for tomorrow’s regulatory changes.
Partnering with experts doesn’t just reduce risk; it empowers your internal team with the confidence and tools to manage these standards effectively on their own.
Find a Clear Path Forward with MKS&H
Adopting the new revenue recognition standards is more than a compliance exercise—it’s a fundamental shift in how your business tracks and reports revenue. This change requires careful planning and system updates to ensure accuracy and long-term success.
With MKS&H as your partner, you gain both technical expertise and industry-specific insight to simplify the transition. Our team works closely with you on everything from contract analysis and staff training to process optimization, ensuring your business not only meets ASC 606 and IFRS 15 requirements but also benefits from the changes.
We go beyond compliance, helping you strengthen your financial reporting and create a solid foundation for growth. If your business is ready to turn these challenges into opportunities, contact MKS&H today to get started.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into a truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture, and your business goals. This approach enables our clients to achieve their greatest potential.
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