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Accounting and Tax Planning

Recording Revenue

By Rebecca Connolly

Recording revenue is, in anyone’s mind, seen as a job well done when you complete selling your product or service or receiving a donation for your organization.

But a new revenue-recognition standard for non-public companies is effective for years ending Dec. 31, 2019 and annual periods then after, and business owners and managers must be aware of what this new standard means.

The new revenue-recognition standard, Accounting Standards Codification 605, Revenue Recognition, created a five-step process to determine when you should recognize revenue.

• Step 1: Identify a contract with a customer. This contract can include an invoice, a formal signed contract, and other various forms agreed to upon the purchase of goods or services. Once a contract has been identified, you proceed to step 2.

“Know what you are signing and know, if you are entering into a long-term contract, how to structure it in accordance with generally accepted accounting principles.”

• Step 2: Identify the performance obligations (promises) in the contract. Contracts can have one or more performance obligations. An example of one performance obligation is to deliver the 10 office chairs that were ordered by a customer. An example of multiple performance obligations within a contract is a construction contract that requires a house to be built and suitable for living, a driveway to be installed, and a garage to be constructed. The key item here is to know what you are signing and know, if you are entering into a long-term contract, how to structure it in accordance with generally accepted accounting principles. Then you proceed to step 3.

• Step 3: Determine the transaction price. Transaction price is the amount of consideration the entity expects to be entitled to, in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. This item concerns how much money the entity expects to receive. As one example, if you sell office chairs for $59 a chair, but there is a sale and the chairs are now $45 a chair, then the revenue the entity can expect to receive for the chair at this time is $45 a chair. Elements from step 2 and step 3 are then used in step 4.

• Step 4: Allocate the transaction price to the performance obligation in the contract. If there is only one performance obligation of the office- chair delivery, then no allocation is needed. It gets complicated when you have more than one performance obligation in a contract. The best method is to allocate the price per performance obligation in the contract itself. Continuing the example of the construction of a house, the price could be allocated at $200,000 and the garage and driveway obligation could potentially be allocated at $100,000. An important element here is to be consistent in your application of the price allocations and document your process with the allocation among performance obligations. Once prices are allocated, you can proceed to step 5.

• Step 5: Recognize revenue when (or as) the reporting organization satisfies a performance obligation. Recognizing the revenue in the amount determined in step 4 has become more of a checklist item, as, yes, we have completed the performance obligation, and now the revenue can be recorded. This step is ‘I have delivered the office chairs and have completed the performance obligation with this contract.’

Conclusion

The moral of the new revenue-recognition standard is that the rules are changing, and it is best to look at your contracts and how you record revenue now before your accountant comes in and notes your revenue is overstated by $300,000.

Rebecca Connelly, CPA is a manager for West Springfield-based Burkhart, Pizzanelli, P.C. She is involved in the accounting and consulting aspects of the practice and manages engagements of various size and complexity, including nonprofit and construction companies, manufacturing, and distributors; (413) 734-9040.

Opinion

Editorial

The headlines came in rapid succession, and they juxtaposed each other nicely.

The site in South Hadley’s Woodlawn Plaza that was once home to a Big Y supermarket is the proposed location of a mixed-income apartment complex. Meanwhile, in Westfield, plans were announced to convert the former Bon-Ton department store location in the Westfield Shops into a 50,000-square-foot trampoline park, complete with dodgeball courts, an American Ninja Warrior-style course, and climbing walls.

These headlines, and they’re only the latest of this nature — highlight how the retail landscape is changing, and also how this region and individual communities within it will be challenged to find new and imaginative uses for the hundreds of thousands of square feet of retail space now vacant or likely to be vacant.

This is not a local problem or a regional problem. Indeed, it’s a national problem and probably an international problem: just what do we do with all that space once assigned to retail?

It’s a question that needs to be answered because, from everything we’ve gathered and from everything the experts are saying, the pendulum is simply not going to swing back the other way on this issue. Traditional retail is shrinking, and it is vanishing.

In fact, the world of retail started to change perhaps a full decade and a half ago, and the process of change has only accelerated. Fewer people are shopping in actual brick-and-mortar stores, while many of the brands that once dominated this industry — like Sears and JCPenney — have been closing stores in large numbers.

These two forces have collided in places like the Eastfield Mall, which now boasts some of the largest and most barren parking lots to be seen anywhere. Plans are being developed to turn the mall, this region’s first real suburban shopping mall (it opened more than a half-century ago), into what is being called a ‘village,’ one where people can live, work (perhaps), drop off their children at day care, see a movie, work out at a gym, eat at a restaurant, and maybe even get on a trampoline. This sounds ambitious, but it is also reality. The Eastfield Mall can never again be what it once was, so it has to become something else.

And this same phenomenon is happening all across the region. The former Big Y supermarket in South Hadley was simply not going to become another supermarket, not that the owners of the property didn’t try to lure one there. So it has to become something else. Tower Square in Springfield is never going to be the thriving retail hub it was in the ’70s ever again, so it has become the home of two colleges — and soon it will be home to a YMCA and a brewery. The Bon-Ton site was not going to house another department store — in a year or 10 years. Hence, a trampoline park.

Let’s hope there is need for other things as well, because, as we said, this trend will only accelerate. More department stores will close, more mom-and-pop stores will close, and eventually the need for large auto dealerships will subside, and we’ll need to find new uses for them. (One auto dealership in Westfield has already been converted into a gym, a restaurant, and indoor batting cages.)

This kind of imagination is going to be needed moving forward, because there are now vacant stores in malls, strip malls, and Main Streets across the region. And there will only be more of them.

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