by Steve Katzman, UHY LLP

The new revenue recognition standard ASU 2014-09, Revenue from Contracts with Customers (collectively ASC 606) was originally effective for annual reporting periods beginning after December 15, 2018 for non-public entities.

In response to the pandemic, on May 20, 2020 the Financial Accounting Standards Board (“FASB”) voted to delay the effective date of the standard for one year for all private entities that had not yet issued financial statements reflecting the implementation of the new standard.

Staffing firms who have plan to implement ASC 606 this year should consider the following topics:

SUCCESS-BASED PAYMENTS / PERMANENT PLACEMENT REVENUE

Staffing companies will need to evaluate revenue generated from success fees, bonuses, or permanent placement revenues. Prior to ASC 606, these types of revenues were generally recognized after a certain benchmark was achieved. Under ASC 606, staffing companies will need to estimate and include these revenues in the initial transaction price of the contract with employees. This requires judgment and more time and effort to determine the likelihood of achieving these benchmarks.

VARIABLE CONSIDERATION

The transaction price in a contract reflects an entity’s expectations about the consideration it will be entitled to receive from the customer. If the consideration includes a variable amount, the entity needs to estimate the amount of consideration to which it will be entitled in exchange for performance of the services it provides. Variable consideration includes items such as volume discounts, rebates, refunds and price concessions. Entities will need to estimate the variable consideration and should consider historical, current and forecasted information.

COSTS TO ACQUIRE A CONTRACT

Incremental costs to obtain a contract are now recognized as assets subject to amortization, instead of expensed. Incremental costs are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commissions).  As a practical expedient, entities may recognize these costs as an expense if the amortization period of the asset is one year or less.

PRINCIPAL VS. AGENT CONSIDERATIONS

Companies will need to evaluate transactions that involve multiple parties, such as a managed service provider (MSP) and determine if revenue should be reported on a gross basis or net basis.  ASC 606 is similar to prior guidance; however, the key difference is that ASC 606 focuses more on control as the main principle to consider. Control refers to the ability to direct the use of, and obtain substantially all of the remaining benefits of the asset. It also includes the ability to prevent other entities from directing the use of and obtaining benefits from an asset.

IMPLEMENTATION RELIEF

For most privately held entities with a calendar year end of December 31, 2019, the implementation period for the adoption for ASC 606 has passed. However, if an entity has not yet  completed its implementation of ASC 606, and has not yet issued (or made available) financial statements that reflect adoption of the guidance, the FASB provided an additional one-year deferral of ASC 606.
Adoption of the new revenue standard takes a significant amount of time and effort. Staffing companies should bring the leaders of marketing, sales, and legal departments together with accounting and finance to understand these issues, and how they may impact their financial statements after adoption of the new standard.

Steve Katzman is a member of UHY LLP’s (https://uhy-us.com/)  the Audit and Assurance Department as well as part of the firm’s National Staffing Practice. Steve performs research related to the presentation and valuation of various transactions within financial statements in accordance with GAAP and other authoritative guidelines. He provides audit, review, compilation, tax, and business advisory services for clients primarily in the middle market including many staffing firms. He is a licensed CPA in the state of Michigan.