New Guidance on Revenue Recognition | RKL LLP
Posted on: June 26th, 2014

New Guidance on Revenue Recognition for Contracts with Customers

New guidance from FASB could potentially affect companies’ day-to-day accounting and the way business is executed through contracts with customers. ASU No. 2014-09, Revenue Contracts with Customers clarifies the principles for recognizing revenue when an entity enters into contracts with customers and is effective for nonpublic entities for annual and interim periods beginning after December 15, 2017, with certain elections for early adoption available.

Background of the ASU

New guidance from FASB on revenue recognition for contracts with customers.

New guidance from FASB on revenue recognition for contracts with customers.

Previous revenue recognition guidance in U.S. GAAP comprised broad revenue recognition concepts together with numerous revenue recognition requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions.  Under International Accounting Standards Board (IASB), the previous guidance was limited in its scope and was difficult to apply to complex transactions.  As such, the FASB and the IASB initiated a joint project to clarify the principles of revenue recognition and develop a common standard for U.S. GAAP and International Financial Reporting Standards (IFRS).

This guidance amends the existing FASB Accounting Standards Codification, creating a new Topic 606, Revenue from Contracts with Customers, while the IASB is issuing IFRS 15, Revenue from Contracts with Customers.

Details of the ASU

The core principle of the guidance is that an entity should 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.

To achieve that core principle, an entity should apply the following steps:

  1. Identify the contract(s) with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations in the contract
  5. Recognize revenue when (or as) the entity satisfies a performance obligations

The ASU also provides guidance on disclosures that should be provided to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue recognition and cash flows arising from contracts with customers.  Qualitative and quantitative information is required about the following:

  1. Contracts with customers – including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations)
  2. Significant judgments and changes in judgments – determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations
  3. Assets recognized from the costs to obtain or fulfill a contract

Considerations for Private Companies

 The FASB felt the need to centralize the guidance on revenue recognition, particularly in the case of complex arrangements involving contracts with customers and multiple deliverables.  Previously, an entity would have potentially considered a combination of general revenue recognition guidance as well as industry-specific revenue guidance for some transactions.  This new standard provides a “one stop shop” for entities to consider when recognizing revenue.   Additionally, it will help users of financial statements better understand how entities are recognizing revenue.

Although the FASB believes that over time this will simplify the guidance on revenue recognition, the details for specific transactions can still be very complex.  Entities should become familiar with the nuances of the revenue recognition process in this guidance when applying to their own unique transactions.

Have questions about this guidance? RKL is here to help. Contact your RKL advisor or one of our local offices for details and assistance in assessing the impact of adoption.

New Goodwill Accounting Guidance from PCCContributed by Michael P. Jones, CPA, a manager in RKL’s Audit Services Group. Mike specializes in serving the audit and accounting needs of commercial, not-for-profit and governmental organizations. 

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