The new revenue recognition standard will have repercussions beyond updates to internal processes and reporting. ASC Topic 606, Revenue from Contracts with Customers changes the definitions of contracts to be recognized at a point in time versus contracts recognized over time, which may mean that companies are recognizing the revenue later, or oftentimes earlier under ASC Topic 606 than they did under previous U.S.GAAP.

In addition to changes to the timing of revenue recognition, costs associated with revenue may be recognized at different times. A company may find that it is recognizing revenue in a way that is not permissible for tax purposes, and so it would have to change its method of revenue recognition for taxes.

If a company is in the middle of a complex transaction during the transition period, changes resulting from the new revenue recognition period could also disrupt the financial reporting performed during the due diligence process. The following are among the considerations that companies may want to consider as part of their future planning for any mergers, acquisitions, sales, or divestitures.

Forward-Looking Financial Information

Early on in the deal process, an acquiring entity will be evaluating a target's projected financial performance. Although all entities should be evaluating how the adoption of revenue recognition will affect their financial statements—the new standard requires disclosures about the impact of the standard in the year of adoption—companies may not have done a thorough impact analysis on historical or projected results.

For transactions in which a confidential information memorandum (CIM) has not yet been introduced, both parties may want to discuss whether revenue recognition will be a significant factor for the target, and if so, how to account for that impact in the purchase price and other transaction negotiations.


Many companies use an EBITDA valuation method to determine the enterprise value of a target or sale. The EBITDA method uses EBITDA combined with multiples to help measure expected cash flow for the target. Companies that recognize revenue earlier, delay revenue until later years or discloses something more granular in accordance with ASC Topic 606's expansive disclosure requirements may change an analyst's view of the company's EBITDA, and that EBITDA multiple may decrease or increase. A lower EBITDA multiple may not be what the seller is looking for with the transaction, while a higher EBITDA may lead the buyer to think the business is being overvalued.

It will also be more challenging for companies to look at similar transactions because of the influence revenue recognition will have on EBITDA multiples and the inconsistencies that may result from applying a principles-based standard. Companies that are going through complex transactions immediately after the implementation period may not have a strong comparison for how similar transactions were valued because the like-transactions may not have had to contend with the revenue recognition impact on EBITDA multiples.

Working Capital

Delayed or accelerated revenue from contracts will affect working capital, so targets set before the implementation of ASC Topic 606 may need to be reworked post-adoption. Transactions that occur immediately after the adoption of the revenue recognition standard may also be affected because working capital targets are often set based on the preceding 12 months of working capital data.

Earn Outs

If your M&A plan includes earn out provisions, it will be vital to determine how adopting the revenue recognition standard will affect financial results. Companies could decide to calculate the earn out using the new standard, but if they don't have insight or estimates into how adopting ASC Topic 606 will affect the calculation of earn out payments, that option may not be ideal. Alternatively, companies could agree to calculate earn outs based on the old standard, but that method would require keeping two sets of books, which also may not be ideal.

Financial metrics may be used to determine the earn outs, and so companies may also want to consider calculating the earn out based on metrics that are not likely to be affected by revenue recognition.

Representation & Warranties

For transactions occurring before the adoption of the new standard, the target company should be prepared for representations and warranties that the company is prepared to adopt the new standard. If the target is a public company, the company will also want to represent that prior disclosures about the estimated impact of adopting the new standard are accurate.

Public Company Considerations

Public companies may encounter issues with revenue recognition if they are required to file the Form S-3, particularly if they elect the full retrospective transition method. The Form S-3 may require the filing of restated financial statements for the previous three years prior to the filing of the 2019 Form 10-K in the year of adoption. Companies could avoid the filing of restated financial statements if they file their Form S-3 in the first quarter of 2018.

When In Doubt, Seek Help

The wide-ranging impact of the revenue recognition standard will make it essential that all companies are prepared for adoption. If your company anticipates a sale or acquisition before and immediately after the new standard takes effect, it may want to consult with an experienced accounting provider to ensure that the company is prepared for all the revenue recognition considerations it may encounter.

If you have specific comments, questions or concerns about how revenue recognition may affect your transactions, please contact Brad Hale of MHM's Professional Standards Group. Brad can be reached at 727.572.1400 or

Published on November 16, 2017