In May 2014, the FASB issued guidance which clarifies the principles for recognizing revenue when an entity enters into contracts with customers.
In the July 2015 FASB Board Meeting, the Board approved the deferral of the effective date of the new revenue standard by one year. As a result, nonpublic entities should apply the new revenue standard to annual reporting periods beginning after December 15, 2018.
Background of the ASU
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 to 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.
Considerations for Private Companies
This guidance has the potential to affect every entity’s day-to-day accounting and, possibly, the way business is executed through contracts with customers. 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.