Revenue Recognition

WHY DID THE FASB ISSUE A NEW STANDARD ON REVENUE RECOGNITION?

Revenue is one of the most important measures used by investors in assessing a company’s performance and prospects. However, revenue recognition guidance differs in Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)—and many believe both standards are in need of improvement.

On May 28, 2014, the FASB and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers. The new guidance is a major achievement in the Boards’ joint efforts to improve this important area of financial reporting.

Presently, GAAP has complex, detailed, and disparate revenue recognition requirements for specific transactions and industries including, for example, software and real estate. As a result, different industries use different accounting for economically similar transactions.

The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers. The new guidance:
  • Removes inconsistencies and weaknesses in existing revenue requirements
  • Provides a more robust framework for addressing revenue issues
  • Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
  • Provides more useful information to users of financial statements through improved disclosure requirements, and
  • Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer.
The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers.

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WHAT IS THE CORE PRINCIPLE OF THE NEW STANDARD?

To meet that objective, the new guidance establishes the following core principle:

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.

A company would apply the following five steps to achieve the core principle:


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HOW WILL THE NEW STANDARD CHANGE CURRENT U.S. GAAP?




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WHO WILL BE AFFECTED BY THE NEW GUIDANCE?

The new guidance on revenue recogntion affects any reporting organization that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts).
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WHAT IS THE JOINT TRANSITION RESOURCE GROUP (TRG)?

On June 3, 2014, the FASB and the IASB announced the formation of the Joint Transition Resource Group for Revenue Recognition (TRG).

The TRG will inform the IASB and the FASB about potential implementation issues that could arise when companies or organizationsentities implement the new standard. The TRG also will provide stakeholders with an opportunity to learn about the new standard from others involved with implementation. The TRG will not issue guidance.

Members of the TRG include financial statement preparers, auditors and users representing a wide spectrum of industries, geographical locations and public and private companies and organizationsentities.

The boards expect that the TRG will meet twice in 2014 and four times in 2015. The first meeting is scheduled for July 18, 2014. All meetings will be public and co-chaired by the vice chairmen of the FASB and the IASB.

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HOW CAN I SUBMIT AN ISSUE FOR THE TRG TO CONSIDER?

Any stakeholder can submit a potential implementation issue for discussion at TRG meetings. The FASB and the IASB will evaluate each submission and prioritise the issues for discussion at TRG meetings.

More information about the TRG, including instructions for submitting a potential implementation issue, is available on the FASB’s website.


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WHEN WILL THE FINAL ACCOUNTING STANDARDS UPDATE BE EFFECTIVE?

For public organizations, the guidance in the Update is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Early application is not permitted.

A public organization is an organization that is any one of the following:
  1. A public business organization
  2. A not-for-profit organization that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market
  3. An employee benefit plan that files or furnishes financial statements to the U.S. Securities and Exchange Commission.
For nonpublic companies and organizations, the new guidance will be required for annual reporting periods beginning after December 15, 2017, and interim and annual reporting periods after those reporting periods. A nonpublic entity may elect early application, but no earlier than the effective date for public entities.

The period of time from the expected issuance of the guidance until its effective date is longer than usual. In this case, the FASB decided that a delayed effective date is appropriate because of the scope of organizations that will be affected and the potentially significant effect that a change in revenue recognition has on other financial statement line items.


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