Rarely have I written in this column anything concerning accounting. Recently, however, Buchbinder published information for our clients regarding new revenue recognition standards that may impact private companies. Because most PR firms are private companies and not public, these new rules will be important for financial reporting by PR agencies, both public and private.
Who will these rules impact?
The Financial Accounting Standards Board’s new revenue recognition standards will affect not only public companies, but also many private companies whose lenders or investors require them to follow Generally Accepted Accounting Principles. If your PR firm is one of them and has a calendar year end, these standards became effective beginning in 2019 and can very well impact your financial reporting.
What’s behind the new standards? A primary goal was to shift away from the previous rules-based approach to revenue recognition, which varied by industry, and toward a principles-based approach which applies more broadly. Therefore, the new standards apply to most customer contracts across numerous sectors.
A fundamental principle behind the standards is that organizations should recognize revenue to “depict the transfer of promised goods or services … in an amount that reflects the consideration to which the entity expects to be entitled in an exchange for those goods or services.”
The FASB has outlined a five-step process for applying this principle:
Ensure parties can identify the payment terms. Several criteria must be met for a contract to exist. Among others, the parties must have approved the contract, and they must be able to identify the payment terms.
Ensure parties can identify the performance obligation(s) in the contract. A performance obligation is a promise to deliver a good or service to the customer. (FYI, all your “clients” are your customers.)
Determine the transaction price. This should account for, among other factors, variable consideration, a significant component or a noncash component (barter as an example).
Allocate the transaction price to the performance obligation in the contract. If the contract includes more than one performance obligation, the transaction price should be based on the relative stand-alone price of each … service.
Recognize revenue when (or as) the firm satisfies the performance obligation by transferring the promised … service to the customer. When the organization satisfies the performance obligation over time, it can measure its progress in one of two ways. The first method is not attributable to a PR firm however. The second method recognizes revenue by measuring value to the customer of the …services transferred. This could be measured by identifying the milestones reached.
If you’re required to use GAAP, the new revenue recognition standards will likely affect your firm’s financial statements, tax obligations and loan agreements. They also may require changes to your firm’s accounting processes and IT systems. You CPA can help identify the changes needed and offer guidance on implementing them.
I have some room to give something extra this month. The Tax Cuts and Jobs Act changes some educational benefits. Accordingly, I’ll briefly discuss how 529 plans could be useful.
Section 529 plans allow you to contribute to an account that can be used to pay for a student’s qualified education expenses. Different states and state agencies offer the plans. (There are also prepaid tuition plans. Contact your tax advisor for more information.)
The benefit of the 529 plan is amounts can grow tax-deferred, so long as a few requirements are met. The money must be used to cover qualified educational expenses for the beneficiary. While the contribution is not deductible for federal tax purposes, some states, such as New York, do allow a deduction.
Through 2017, only postsecondary education expenses qualified. With the passage if the Tax Cuts and Jobs Act, tuition at elementary or secondary schools also may qualify, subject to a $10,000 per student per year limit.
For post-secondary education, qualified expenses include not only tuition but also required fees, computer technology, books and, generally, room and board.
Contributions to 529 plans are limited to the extent that they cannot exceed the amount necessary to provide the beneficiary’s qualified expense, but there is no specific dollar amount cutoff under the federal law.
Your CPA can help you determine the best ways for you to save for your child’s or grandchild’s education.
Richard Goldstein is a partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants.