As part of the ongoing effort by the Financial Accounting Standards Board (FASB) to converge generally accepted accounting principles in the United States (U.S. GAAP) with International Financial Reporting Standards (IFRS), Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), was issued in May 2014. This new standard changes how revenue is recognized from a transaction and industry specific approach, to a more holistic, principles based approach.
Revenue recognition under the current standards (Topic 605) provides for a broad and sometimes inconsistent approach that can lead to varying results when accounting for fundamentally similar revenue transactions. Accordingly, FASB and the International Accounting Standards Board (IASB) together addressed concerns related to the complexity and inconsistency in accounting for revenue by issuing revenue recognition standards updates that, with a few minor exceptions, achieves convergence between the standards setting boards. Among other objectives, the new revenue recognition standard seeks to clarify the principles for recognizing revenue, remove inconsistencies in accounting for revenue, improve comparability across entities and industries, and provide enhanced disclosures to the users of the financial statements.
In August 2015, FASB issued ASU 2015-14, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date, which extended the effective date of ASU 2014-09 one year. Accordingly, for all public entities, ASU 2014-09 is applicable to annual reporting periods beginning after December 15, 2017. For all other entities the guidance is applicable to annual reporting periods beginning after December 15, 2018. Early implementation is permitted, however, some restrictions apply.
How the New Revenue Recognition Standard Affects Your Entity
All public, private and non-profit entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of non-financial assets are affected by the new revenue recognition standard unless those contracts are within the scope of other standards (i.e. lease and insurance contracts). Contracts can be written, oral, or implied by customary business practices.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods and services. To accomplish this, the new revenue recognition standard provides a five-step approach that each entity should follow.
- Identify the contract(s) with a customer.
- 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.
In addition to revenue recognition matters, ASU 2014-09 also provides guidance on the following:
- Accounting for costs to obtain or fulfill a contract.
- Licenses (e.g. software, franchises, parents)
- Improved disclosures to help financial statement user understand revenue.
What Should You Do?
With the effective date fast approaching it is time for you to begin assessing whether or not the standard applies to your entity and whether or not your entity has the capability to comply with the standard. The standard is required to be applied retrospectively; therefore it is highly recommended that entities are prepared for the new revenue recognition standard one year in advance of implementation as dual reporting may be necessary.
As of the date of this article, FASB has issued several technical corrections and changes to the new revenue recognition standard. It is expected that FASB will continue to review the standard, provide clarifying guidance, and propose clarification to the new revenue recognition standard. AICPA members can access various tools and resources through the AICPA’s Financial Reporting Center at http://www.aicpa.org .
Have you considered the following?
- What are the tax implications of adopting the new revenue recognition standard?
- How will your entity address the restatement of comparative periods?
- Does your entity have an implementation plan for adopting the new revenue recognition standard?
- Will the new revenue recognition standard affect your entity’s internal controls?
- Are your customer contracts reflective of how best to recognize revenue?
- Do your contracts (written, oral, or implied) meet the criteria to be considered a contract within the scope of FASB ASC 606?
- Do you typically have contract modifications that may be considered either a modification of an existing contract or a separate contract?
- Do your contracts contain variable consideration which will require analysis or estimation to record revenue?
- Are there multiple performance obligations against which the selling price should be allocated?
If you haven’t considered the new revenue recognition standard and how it will impact your entity, now is the time. For calendar year-end, non-public entities, it is recommended to have processes and procedures in place by January 1, 2018. This will allow the entity to account for revenue under the new standard for a full year prior to implementation which will be necessary for retrospective application of the new standard.
For more information or to work through a detailed plan with Melanson Heath, please contact Deborah Tarbox or Matt Sawyer at 1-800-282-2440.
By Matt Sawyer, CPA
Supervisor – Melanson Heath