What You Need to Know About 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 U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)—and many believe both standards are in need of improvement.

Presently, U.S. GAAP has complex, detailed, and disparate revenue recognition requirements for specific transactions and industries including, for example, software, real estate, and construction contracts.

As a result, different industries use different accounting for economically similar transactions. Conversely, IFRS has two main revenue recognition standards with limited implementation guidance that many believe can be difficult to understand and apply.

During the first half of 2014, the FASB and the IASB will issue new accounting standards for recognizing revenue from contracts with customers. This new guidance is the result of the FASB’s joint project with the IASB to improve and converge revenue recognition rules. The new guidance will replace numerous, industry-specific U.S. GAAP revenue recognition requirements that are very difficult to sustain as industries evolve. It also will replace the two main IFRS standards that have limited implementation guidance and can be difficult to understand and apply.
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 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. It will:
  • Provide a more robust framework for addressing revenue issues as they arise
  • Increase comparability across industries and capital markets
  • Require better disclosure so investors and other users of financial statements better understand the economics behind the numbers.
The new guidance establishes the following core principle:

Recognize revenue in a manner that depicts the transfer of 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 or other organization will apply the following five steps to achieve the core principle:


Industries that are likely to experience the most changes include telecommunications, aerospace, construction, asset management, real estate, and software.



Industries that are likely to experience the most changes include telecommunications, aerospace, construction, asset management, real estate, and software.

In the months after the new guidance is issued, the FASB plans to issue documents that will address common questions posed by these industries.

For public companies, the new guidance will be required for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Early application is not permitted.

For private companies and not-for-profit 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. Private companies and not-for-profit organizations may elect early application, but no earlier than the effective date for public companies.

During the time between now and the effective date of the new guidance, preparers have explained to us that they will be focusing on some of the following activities:
  • Manage any information systems work needed to adopt the new standard
  • Develop and implement any necessary internal controls
  • Understand the likely impact on financial results
    • Develop internal and external communication plans so interested parties can understand trends
    • Analyze and implement any changes in sales or pricing strategies
    • Analyze if any corporate policies tied to revenue (e.g. sales commissions, compensation plans) need to be revised in light of the new standard.
For more information on the revenue recognition project, visit the FASB website.