The 5 Ws of the new revenue recognition standard

Posted on Jun 26, 2014 in Revenue Recognition

By Julie Eisenhauer, CPA

On May 28th, under a joint project, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued their new standards for accounting for revenue under contracts with customers.

Why the New Standard?

Currently, U.S Generally Accepted Accounting Principles (GAAP) include many revenue recognition requirements across many specific industries, resulting in different accounting for similar transactions. The new standard improves comparability across entities, industries, jurisdictions and capital markets. It also removes inconsistencies, provides a more robust framework, and provides more useful information to users of the financial statements through improved disclosures.

What are the Main Provisions?

The core principal is that an entity should recognize revenue 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 this principal, an entity should apply the following steps:

1. Identify the contract(s) with a customer.

2. Identify the performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations in the contract.

5. Recognize revenue when (or as) the entity satisfies a performance obligation.

Who is Affected?

The guidance applies to all entities that enter into contracts with customers to transfer goods or services unless the contracts are within the scope of other standards (i.e., insurance contracts or lease contracts).

The new standard is expected to have a significant impact on a number of industries including real estate, telecommunications, computer software, automotive, and media entities.

When is the New Standard Effective?

For non-public entities, the provisions of the new standard are effective for annual periods beginning after December 15, 2017. Public entities must apply the new standard for annual periods beginning after December 15, 2016.

Where Do I Recognize the Cumulative Effect of the Transition?

The new guidance should be applied using one of two methods:

1. Retrospectively to each reporting period presented.

2. Retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application (comparative periods would not be restated).

Preparers who are presenting comparative financial statements and elect to implement the new standard under the first method, would need to have their systems in place to restate the revenue recognized under the new guidance by January 1, 2017.

Next Steps

FASB and IASB have established a joint transition resource group to aid in the shift to the new standard. Additionally, the AICPA is forming a variety of industry-focused groups to provide more detailed guidance. These groups will provide answers and interpretations of the new guidance over the next few years.

Clark Nuber will monitor the interpretations provided by this group and will provide additional guidance as to how the new rules will affect specific industries.

How will the provisions of this new standard impact your accounting for contracts with customers? Clark Nuber is available to answer your questions.

© Clark Nuber PS, 2014.  All Rights Reserved

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

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