Revenue recognition and the impact on quality of earnings
The new revenue recognition standard can impact quality of earnings and throw private equity groups' old valuation models into flux. Here's what the changes might mean for due diligence. Read more at Crain's Cleveland.
The new, principles-based revenue recognition model is raising new considerations for private equity groups on both sides of a transaction. The new standard can impact quality of earnings of a business, so whether you're acquiring, selling, or planning to exit down the road, the due diligence process isn't going to be the same.
Performance metrics, including EBITDA and others, are likely to be impacted by the new standard. In turn, private equity groups will need to revisit their valuation models to account for those changes.
The new revenue recognition model goes into effect this year for public companies and in 2019 for other organizations, but entities could early-adopt in 2017. As a result, some target companies may have already adopted while others haven't yet given it much thought.
As a private equity group, you'll want to be sure you understand where along the adoption continuum a target company is and then carefully consider the impacts on quality of earnings during the due diligence process.
Besides adjusting your valuation models, ensure your portfolio companies begin reviewing contracts and assessing the impact — and the changes that will need to be made — now, in addition to addressing several other pre- and post-implementation considerations.
Read more at Crain's Cleveland.