Understanding the New Revenue Recognition Standard

On May 28, 2014, the International Accounting Standards Board (IASB), responsible for International Financial Reporting Standards (IFRS), and the Financial Accounting Standards Board (FASB), responsible for U.S. Generally Accepted Accounting Principles (U.S. GAAP), jointly issued a converged standard on the recognition of revenue from contracts with customers.

The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (i.e., payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (e.g., service revenue and contract modifications), and improve guidance for multiple-element arrangements.

Who is Impacted?

Potentially anyone who accounts for revenue under U.S. GAAP or IFRS and enters into contracts with customers. Industries which are most impacted are software, real estate, and telecom.

Scope of the New Standard

The revised standard replaces all existing U.S. GAAP and IFRS revenue recognition guidance and includes guidance on the following:

  • Revenue contracts with customers
  • Sales / transfers of non-financial assets outside of the entities’ ordinary activities

Application of the New Standard

There are five steps to apply the new standard:

new-rev-recognition-std

In addition to the steps above, there are revised disclosure requirements related to revenue recognition.

The steps above are not required for all sales. For example, a simple point of sale transaction for one discrete product for consideration paid at the time of purchase would only have one performance obligation and therefore there is no need to go through an allocation process as described above.

Transition Effective Dates

For U.S. companies the effective date for implementation is reporting periods beginning on or after December 15, 2016 with a one year deferral for nonpublic entities.

Additional Resources

For a quick overview of the standard, I recommend listening to the one-hour pre-recorded webcast from the FASB / IASB from June 5, 2014.

For a more detailed look, the Big-4 accounting firms have each published guidance on their websites:

Prepare Your Business for the New Standard

Understanding the new revenue recognition standard can be complex and time consuming. If you have questions about the new revenue recognition standard and its impact on your business, contact us for a free consultation.

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