June 9, 2014
FASB Issues Revenue Recognition Standard
On May 28, 2014 the FASB has issued a new revenue recognition standard.
The Revenue Recognition Standard Accounting Standard Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers" will have an impact on many companies following US GAAP. The new standard will create a more principles-based approach to revenue recognition compared to the rule based approach under the existing standards. Under the existing standards companies, depending on their industry, may follow industry revenue recognition guidance. This standard would supersede most industry specific revenue recognition guidance.
Under the new standard, companies will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services.
The new standard would require companies to recognize revenue by applying a five-step process:
Step 1: Identify the contract with a customer.
Step 2: Identify the separate performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the separate performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The new standard will require additional disclosures and provide more guidance for transactions such as service revenue and contract modifications.
Effective date of the new standard:
For nonpublic companies in the United States, the standard takes effect for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Under the new standard, a nonpublic entity may elect to apply this guidance earlier, however, only as of the following:
- An annual reporting period beginning after December 15, 2016, including interim periods within that reporting period (public entity effective date).
- An annual reporting period beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017.
- An annual reporting period beginning after December 15, 2017, including interim periods within that reporting period.
When applying the amendment it should be applied using either of the following methods:
- Retrospectively, to each prior reporting period presented and the entity may elect certain practical expedients. We advise that you consult with your accountants.
- Retrospectively, with the cumulative effect of initially applying this Update recognized at the date of initial application. If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:
- The amount by which each financial statement line item is affected in the current reporting period by the application of this Update as compared to the guidance that was in effect before the change.
- An explanation of the reasons for significant changes.
The International Accounting Standard Board (IASB) has also issued IFRS 15 "Revenue from Contracts with Customers," the new revenue recognition standard for companies using IFRS. If your company reports under IFRS, you should contact your accountants since the adoption date is a different date than the U.S. standard. Please also keep in mind that the adoption date for non-public and public companies are different.
For the actual revenue recognition standard please visit FASB.org.