Revenue recognition transition – Full or modified retrospective?

By - September 7, 2017

The deadline for adoption of the new revenue recognition standards under ASC606 is fast approaching. Public companies need to adopt for fiscal years beginning in 2018 while private companies have until 2019. The changes in how to account for software and services can be significant, often requiring the break out of underlying performance elements that were bundled together under current reporting standards.

Once you have figured out how your revenue should be reported under the new standards, the next big question is which transition approach to employ. (If your company is still trying to figure out the new standards, RSM’s technical accounting consulting (TAC) practice can help.)

The guidance lays out two alternatives for disclosing the revenue recognition transition, both of which require dual accounting to support the disclosure requirements.

  • Full retrospective
    Under the full retrospective approach, the full prior two years of financials are restated to the new standards to provide an apples to apples comparison between the years under the new standards.
  • Modified retrospective
    The modified retrospective approach does not require restatement of prior years but requires disclosure of the year of adoption financials under the old standards to provide the apples to apples comparison under the old standard.

So how do you determine which approach to use? The two major factors are financial statement presentation and level of effort to account for the transition disclosures. From a presentation perspective, the full retrospective approach provides a cleaner financial statement as it avoids mix and match revenue standards, but it does require more effort. A company considering an initial public offering shortly after adopting the new standards may be better served by the full retrospective approach avoiding the comparisons of old and new standards. On the effort front, both transition approaches require significant efforts to support the disclosures and both require dual accounting for some period of time, but full retrospective will have a larger set of contracts that need to be recast. So let’s break down the practical effort required for each method.

Full retrospective

Under the full retrospective approach, the sooner that a multi-book solution can be implemented, the better. A multi-book approach accounts for new contracts under both standards. In a perfect world, implementing this type of dual accounting at the beginning of the retrospective period would be ideal, but most companies will need to perform recast calculations on some period of contracts. The full retrospective also requires two points to calculate a cumulative adjustment. First, a cumulative adjustment will need to be performed at the beginning of the retrospective period and then again at the date of adoption to adjust the company’s primary books to the new standards.

Revenue Recognition Full Retrospective Approach

Modified retrospective

The modified retrospective is a bit simpler in that it only requires one cumulative adjustment of open contracts as of the date of adoption and only requires the cumulative impact calculation of open contracts vs the period by period recast required to support a full retrospective. We recommend establishing a multi-book strategy two purposes:

  • First, the establishment of a legacy GAAP standard book will provide the accounting for the comparative disclosure during the year of adoption.
  • Secondly, the establishment of an ASC606 book reflecting the new standards. This book will assist with calculating the cumulative adjustment as well as providing visibility to accounting differences between the old and new standards leading up to the year of adoption.

Revenue Recognition Modified Retrospective Approach

Regardless of the method you choose to disclose your revenue recognition transition, there will be a significant effort and time is running short. We are helping clients plan for this transition and deploy technologies to support these new requirements. To learn more about how RSM can assist you with your other business needs, contact RSM’s management consulting professionals at 800.274.3978 or email us.


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