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7 Key Facts on the FASB’s Revenue Recognition Standard


Shutterstock_348454145Transitioning to significantly new accounting guidance is always a critical process, and that’s particularly true with the Financial Accounting Standards Board’s Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). Since the effective date for this important guidance has been postponed, CPAs and their clients can now make the most of the added time they need to begin understanding and preparing to apply the standard. Here are seven facts that CPAs should know about this key standard.

Fact #1: Its reach is broad.

Any entity—whether it’s public, private or not-for-profit—that enters into contracts involving goods or services or nonfinancial assets is affected. There are exceptions for contracts that are within the scope of other standards, such as leases and insurance contracts, and for financial instruments, certain guarantees and specific nonmonetary exchanges, but the standard still applies to a wide range of organizations and transactions. Entities should assess the possible impact of the guidance on their financial statements, information systems, processes and controls.

Fact #2: You’ll need a shift in thinking.

Organizations in the United States are used to transaction- and industry-specific revenue recognition guidance under current GAAP, but the new standard, which converges with International Financial Reporting Standards, uses a principle-based approach for recognizing revenue, which is less rules-based and calls for greater judgment in implementation.  

Fact #3: Organizations will likely be making more disclosures.

There are required disclosures on numerous details of contracts with customers, including disaggregation of revenue, contract balances and performance obligations, as well as on significant judgments and on assets recognized in costs to get or fulfill a customer contract.

Fact #4: There have been updates and modifications to the standard since it was first issued.

In the last year, the FASB has issued updates related to principal versus agent considerations (reporting revenue gross versus net); identifying performance obligations and licensing; and narrow-scope improvements and practical expedients, as well as an update to address the rescission of certain Securities and Exchange Commission rules. As you plan the best way for your firm and your clients to implement the standard, be aware of the possibility that further information may have been issued since the standard’s original publication date.

Fact #5: Be prepared to follow the five steps.

The process set forth in the standard calls for these five steps. Many clients may need to be alerted to the changes in approach involved and the best ways to address them.

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

Fact #6: It would be a mistake to postpone tackling this one.

After the FASB issued a deferral of the original effective date for this standard, public entities and certain not-for-profits and employee benefit plans now will apply the guidance to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. For all other entities, the guidance will be effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. However, given the breadth of the standard’s reach, all organizations, and smaller, private entities in particular, are advised to begin informing themselves about the standard and planning to implement it well in advance.

Fact #7: CPAs have access to a wealth of implementation resources.

The AICPA revenue recognition site features news and practical guidance, including information for specific industries, a roadmap to understanding the standard, a learning and implementation plan and a perspective on the standard’s tax effects. The AICPA’s Financial Reporting Executive Committee has released working drafts of revenue recognition implementation issues for the telecommunications industry. Comments are due on October 1, 2016.

Ensure a Smooth Transition

The revenue recognition guidance is a game-changing standard. The good news is that the delayed effective date offers companies the chance to plan for a reasonable and well-planned transition. The AICPA’s PCPS Center for Plain English Accounting (CPEA) has developed valuable implementation resources for its members including the following:

The CPEA Revenue Recognition Series ─ Fortune Favors the Prepared

Part I:      Key concepts, including the minimum requirements to recognize revenue, long-term contracts, variable consideration, and other topics.

Part II:      Key concepts, including application of the terms “Distinct” and “Separately Identifiable,” methods for measuring progress on contracts, and significant financing component.

Part III:     Contract costs, warranties, and bill and hold arrangements.

Part IV   Accounting for licenses.

Part V:     Principal versus agent considerations

ASU 2016-10   Identifying performance obligations, and licensing implementation guidance.

NFP Entities - Part I:      General implementation issues in the not-for-profit sector.

NFP Entities - Part II    Higher education sector implementation issues.

Real Estate Industry    General implementation issues in the real estate sector.

 

For a limited time, Part I of the CPEA Revenue Recognition Series is accessible to all free of charge.

Now is the time to work with clients or employers to ensure smooth implementation of the new requirements. The AICPA puts valuable tools at your fingertips to help you apply the standard.

Bob Durak, CPA, CGMA, Director- Center for Plain English Accounting, American Institute of CPAs.

Revenue Recognition image courtesy of Shutterstock

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