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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.
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:
When applying the amendment it should be applied using either of the following methods:
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.