May 28, 2014
Today the Financial Accounting Standards Board (FASB) issued its long-awaited standard on revenue recognition. Accounting Standards Update (ASU) 2014-09, “Revenue From Contracts With Customers (Topic 606),” is the culmination of a joint project of the FASB and the International Accounting Standards Board (IASB) to replace much of the industry-specific guidance with principles for recognizing revenue and a common revenue standard for U.S. generally accepted accounting principles and International Financial Reporting Standards
This standard affects any entity that enters into contracts with customers unless those contracts are in the scope of other standards, such as lease contracts or insurance contracts. In addition, existing guidance for the recognition of gain or loss on the transfer of some nonfinancial assets that are not an output of the entity’s ordinary activities (for example, property, plant, and equipment) is amended to be consistent with the recognition and measurement guidance.
The core principle is that an entity should recognize revenue from contracts with customers when it transfers 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 and services. The standard creates a five-step approach to achieving that core principle:
- Identify the contract with the customer.
- Identify the separate performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the separate performance obligations.
- Recognize revenue when (or as) a performance obligation is satisfied.
Given the pervasiveness of the revenue recognition standard, the boards have provided for a lengthy implementation period designed to give entities sufficient time to evaluate the financial reporting implementations and put in place compliance processes. As stakeholders, including preparers and auditors, evaluate the final standard, industry implementation guidance is expected to emerge.
For public entities, the ASU is effective for reporting periods beginning after Dec. 15, 2016, including interim reporting periods within that reporting period. Early adoption will not be permitted.
For nonpublic entities, the ASU is effective for annual reporting periods beginning after Dec. 15, 2017, and interim and annual reporting periods thereafter. Early adoption will be permitted, however, only as of the following:
- An annual reporting period beginning after Dec. 15, 2016, including interim periods within that reporting period;
- An annual reporting period beginning after Dec. 15, 2016, and interim periods within annual periods beginning after Dec. 15, 2017; or
- An annual reporting period beginning after Dec. 15, 2017, including interim periods within that reporting period.
An entity should apply the amendments in this ASU using one of the following methods:
- Retrospectively to each prior reporting period presented, and an entity may elect one of the following practical expedients:
- For completed contracts, the entity need not restate contracts that begin and end within the same annual reporting period.
- For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.
- Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If the entity elects this transition method, it also should provide the additional disclosures in reporting periods that include the date of initial application of:
- The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the guidance that was in effect before the change
- An explanation of the reasons for significant changes