written by Aaron Spencer
In May of this year, the Financial Accounting Standards Board (FASB) issued its new revenue recognition guidance in Accounting Standards Update (ASU) No. 2014-09, Revenue for Contracts with Customers. The International Standards Board (IASB) also issued its new revenue recognition guidance under IFRS 15. The New FASB and IASB guidance is nearly identical and represents a single, global revenue recognition model. It also demonstrates the Boards’ ongoing efforts on convergence of US GAAP and IFRS. The issuance of this guidance is the culmination of a near decade long project to develop converged revenue recognition principles.
A new model
ASUE 2014-09 introduces a new model for revenue recognition from contracts with customers. The new principles based model replaces virtually all existing US GAAP revenue recognition guidance and applies to all entities and industries excluding contracts within the scope of other standards such as insurance contracts or lease contracts. The new model is effective for annual reporting periods beginning after December 15, 2016, for a calendar year public entity. For all other entities, the model is effective for annual reporting periods beginning after December 15, 2017. Early application is not permitted for public entities, and a nonpublic entity may elect to apply the guidance early with certain restrictions.
While several years away, planning for implementation of the new model should begin now. This may include consulting with representatives from accounting and finance, sales, legal, tax, human resources and information technology.
The following factors should be considered when implementing new guidance:
- The transition method to be used (full retrospective method or simplified transition approach)
- Which disclosures are applicable to the entity and how the entity will collect data
- Process improvements or changes and internal control changes that may be required
- Sales commissions and the new cost capitalization guidance
- Compensation and benefit plans and the effect from the new guidance
- Combination of contracts and the use of practical expedients
The core revenue recognition principle is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve the core principle of the new model, an entity should apply the following steps:
- Identify the contract(s) with customers
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies a performance obligation.
Immediate effects on companies
- review the nature and amount of disclosures required under the new standard to evaluate whether they collect the required information
- consider whether the changes to the accounting for revenue will affect other areas of the companies’ operations
- wish to reconsider the legal structure of their contracts with customers
- reevaluate how their contracts with customers are priced
- wish to prepare an analysis of how the new standard will affect the company’s bottom line
Please contact us if you have any questions regarding this new model 417-881-0145.