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 GAAP?




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WHO WILL BE AFFECTED BY THE NEW GUIDANCE?

The new guidance on revenue recognition 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 organizations 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 organizations.

The TRG met twice in 2014 and will meet four times in 2015. All meetings are 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?

On April 1, 2015, the FASB voted to propose to defer the effective date of the new revenue recognition standard by one year.

Based on the Board’s proposed decision, public organizations* would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Nonpublic organizations would apply the new revenue standard to annual reporting periods beginning after December 15, 2018.

Public organizations would apply the new revenue standard to interim reporting periods within annual reporting periods beginning after December 15, 2017 (that is, a public organization would be required to apply the new revenue standard beginning in the first interim period within the year of adoption). Nonpublic organizations would apply the new revenue standard to interim reporting periods within annual reporting periods beginning after December 15, 2019 (that is, a nonpublic organization would not be required to apply the new revenue standard in interim periods within the year of adoption).

Additionally, the Board decided to permit both public and nonpublic organizations to adopt the new revenue standard early, but not before the original public organization effective date (that is, annual periods beginning after December 15, 2016). A public organization would apply the new revenue standard to all interim reporting periods within the year of adoption. A nonpublic organization would not be required to apply the new revenue standard in interim periods within the year of adoption.

The FASB plans to expose its decisions for a thirty day public comment period in a proposed Accounting Standards Update (ASU), which is expected to be issued sometime during the second quarter of 2015.

*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.


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