If your business uses an incentive-based pay scale for employees, you’ll want to read on to learn about two new accounting rules that may affect such arrangements.
According to Bloomberg BNA, the new rules, written by the Financial Accounting Standards Board and the International Accounting Standards Board, affect “any entity that either enters into the contract with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards.” In lay terms, what this basically means is that there is now a one-stop, comprehensive source for how companies and nonprofit enterprises are to report revenue, which has long been a problematic area of accounting for the boards.
Specifically, the rules are aimed at improving, simplifying and strengthening revenue recognition principles and practices. They also would reduce inconsistencies in accounting treatments and provide for comparability among companies and across capital markets.
The new rules, which apply to companies domestic and foreign, were issued May 28 and become effective for public companies in 2017, but private companies and nonprofit entities would have until 2018 to apply them.
Bloomberg BNA notes that bonus plans and other incentive compensation agreements may need to be reviewed because such agreements often are based on metrics derived from revenue. They note, for example, that while revenue contracts might remain the same, many companies could record revenue differently under the new rules, which may result in more volatility and less predictability in bonuses and other employee compensation.
Sectors expected to see major changes and faster or slower recognition of revenue include telecommunications, computer software, construction, real estate sales and asset management.