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To everyone but accountants – and the IRS – it might seem a stupid question but, when is the revenue of a snow removal or ice management business considered income? After years of deliberations, the Financial Accounting Standards Board (FASB) issued an “Accounting Standards Update (ASU) on the appropriate accounting treatment for revenue that attempts to answer that question.

Revenue is an important financial measure for every business. Managers, shareholders, lenders, analysts, investors, and regulators all use revenue to monitor an operation’s financial performance and its general financial health. Revenue may also affect, among other things, a snow removal operation’s ability to borrow money or attract investors. It is also often used as a basis for determining certain employee compensation and benefits, such as commissions, bonuses, and stock-based compensation. Anticipated revenue may also influence an entity’s tax-planning strategies.

At its core, the new ASU guidance states that a business “should recognize revenue that shows the transfer of promised goods or services in an amount that reflects the consideration to which the operation expects to be entitled to in exchange for those goods or services.” What could be clearer?

Although it's not unusual that there is a specific time to secure deductions – or to include revenue - until now, the time to claim income and deductions has been dictated by rules or laws – not the operator’s opinion. Under the guidelines for the new Generally Accepted Accountnig Principles (GAAP), most snow and ice removal businesses must report the revenue they “expect” to collect for their services or from their contracts.


The cash method of accounting, where income is income when received and deductions secured when paid, is easiest. However, accuracy has long dictated that the accrual method of accounting more closely reflects reality.

The so-called “revenue recognition” principle is a cornerstone of the accrual method of accounting which, with the so-called “matching principle,” determine the time when revenue and expenses are recognized. According to this principle, revenues are recognized when they are realized or realizable, and are earned (usually when services are rendered or goods are transferred, no matter when cash is received.


In 2014, the FASB, the folks that created the GAAP and the International Accounting Standards Board (IASB) jointly announced new financial accounting standards for revenue recognition entitled “Revenue from Contracts with Customers (Topic 606).” In general, the new revenue recognition principle states that a business using the accrual method of accounting should only record revenue when it has substantially completed a revenue generation process. In other words, revenue is recognized and recorded only when it has been earned.

Naturally, all revenue realized during an accounting period must be included in the snow and ice removal operation’s income. But, going one step further, the new guidelines now require all cash received in either an earlier or a later period than obligations are met (when goods or services are delivered) be recognized and reported along with all related revenue.

Under the new standards, a business will recognize revenue for promised services to customers and clients in an amount that reflects the consideration they expect to be entitled to in exchange for those services. That expectation is based on the following five, sequential steps:

  • Identify a contract with a customer.
    • Separate the contract's commitments.
    • Determine the transaction price.
    • Allocate a price to each promise.
    • Recognize revenue when or as the business transfers the promised good to the customer or performs the service, depending on the type of contract.

    Obviously, if there is any doubt whether payment will be received from a customer, then the seller should recognize an allowance for doubtful accounts for the amount it is expected the customer will renege on. If there is substantial doubt that any payment will be received, the business should not recognize any revenue at all until a payment is actually received.

    In some cases, the updated guidance will result in earlier revenue recognition than in current practice. This is because the new standards require a business to estimate the effects of sales incentives, discounts, and warranties.

    If a snow or ice removal business receives payment in advance, it is recorded as a liability, not as revenue. Only after all work has been completed can the payment be recognized as revenue. Again, if there is substantial doubt that any payment will be received, then the contractor should not recognize any revenue until a payment is received.


    Because many businesses have compensation plans tied to revenue for managers, sales personnel, shareholder/employees, executives or others, compensation arrangements are emerging as a big concern under the new revenue recognition standard. In fact, many of those already implementing the new standards are encountering challenges with compensation policies.

    The new standards result in earlier recognition of revenue which, in turn, often leads to higher commissions or bonuses. In other words, for some snow removal operations, the new accounting standard will change the timing of when revenue will be recognized and therefore may change the way compensation is awarded under existing profit-sharing arrangements.


    Nearly all snow removal and ice management businesses will be affected by the expanded disclosure requirements, including the required footnote disclosures on financial statements. Not too surprisingly, also impacted will the tax picture – and bills – of many snow and ice removal operations.

    The tax laws have long required businesses to obtain the IRS’s consent before changing a method of accounting for federal income tax purposes. In most cases, a taxpayer that wishes to change its accounting method must secure prior consent.

    Fortunately, for some accounting method changes, including complying with the new accounting standards, the IRS provides an automatic procedure for obtaining its consent for the change in accounting methods. However, even the so-called “automatic” procedure requires adjustments to reflect changes in income amounts or deductions as well as the final tax bill for the year of change.

    The IRS’s latest procedure for an accounting method change applies to a snow removal business that wants to change its method of accounting for the recognition of income for federal income tax purposes to a method under the new Standards. In general, the business uses Form 3115, Application for Change in Accounting Method, for an accounting method change.


    While the new rules provide guidance for transactions that weren't addressed completely, such as service revenue and contract modifications, there are a number of notable exceptions such as leases, financial instruments, guarantees and nonmonetary exchanges between entities in the same line of business to facilitate sales. These transactions remain within the scope of existing industry-specific GAAP.

    Answering the question: when is the snow removal and ice management business’s revenue considered income has been clarified, at least for accountants and the IRS. Obviously, with all snow removal operations and businesses now required to report revenue and follow hundreds of pages of new accounting guidance, seeking the all-so-necessary professional help in complying is important.

    Mark E. Battersby is Snow Magazine's financial writer. He's based out of Ardmore, Pa.