Revenue Recognition

WHY DO WE NEED A NEW STANDARD ON REVENUE RECOGNITION?

Revenue is an important number to users of financial statements in assessing a company’s performance and prospects. However, revenue recognition guidance differs in U.S. GAAP and IFRS. As a result, many believe both are in need of improvement.

Current revenue recognition guidance under U.S. GAAP comprises many disparate requirements for specific transactions and industries including, for example, software, real estate and construction contracts. Presently, there are over 200 specialized and/or industry-specific revenue recognition requirements under U.S. GAAP. Despite this significant volume of requirements, new and emerging transactions sometimes lack explicit guidance and therefore differences in reporting may arise.

To address these issues, in early 2014, the Boards will issue improved revenue recognition guidance that:
  • Provides a more robust framework for addressing revenue issues as they arise
  • Increases comparability across industries and capital markets
  • Requires better disclosure so investors and other users of financial statements better understand the economics behind the numbers.
The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers.


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THE CORE PRINCIPLE OF THE NEW REVENUE RECOGNITION STANDARD

To meet that objective, the new guidance establishes the following core principle:

Recognize revenue in a manner that 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.

A company would apply the following five steps to achieve the core principle:


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WHAT WILL THE BOARD DO TO ADDRESS ISSUES THAT MAY ARISE DURING TRANSITION TO THE NEW GUIDANCE?

In 2013, the FASB and the IASB announced the formation of a joint transition resource group to be established after the final guidance is issued in early 2014. The group will consist of 10-15 specialists representing preparers, auditors, regulators, users, and other stakeholders as well as members of the FASB and the IASB. Its objective will be to promote effective implementation and transition to the converged standard.


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HOW WILL THE NEW STANDARD CHANGE CURRENT U.S. GAAP?

 Today  Under the new guidance
There are numerous requirements for recognizing revenue. There will be consistent principles for recognizing revenue, regardless of industry and/or geography.
Other than disclosures in accounting policies and segment reporting, most companies and other reporting organizations provide limited information about revenue contracts. Organizations will be required to disclose quantitative information about contracts with customers, including disaggregation of revenue, contract balances and changes in those balances, remaining performance obligations and information about assets recognized from the costs to obtain or fulfill contracts with customers; and qualitative information about revenue contracts including significant judgments involved in applying the revenue guidance.
Many goods or services promised in a contract with a customer are deemed not to be distinct revenue-generating transactions when in fact those promises might represent separate obligations of the entity to the customer. Reporting organizations will be required to assess the goods or services promised to a customer, identify performance obligations on the basis of whether the goods or services are distinct, and recognize revenue when (or as) each performance obligation is satisfied.
In a multiple element arrangement the amount of consideration allocated to a delivered element is limited to the amount that is not contingent on delivering future goods or services. Companies will be required to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.
Accounting for variable consideration differs greatly across industries. Variable consideration will be included in the transaction price to the extent it is probable that a significant revenue reversal will not occur. Consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items.

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WHERE ARE WE IN THE PROCESS NOW?

Following the issuance of the second Exposure Draft in November 2011, the Boards and the staff engaged in extensive outreach with constituents from nearly all significant industries and geographies. The Boards plan to complete redeliberations of the proposed revenue recognition standard during the first quarter of 2013.

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WHEN WILL THE FINAL ACCOUNTING STANDARDS UPDATE BE EFFECTIVE?

The timeline below summarizes activities related to the final Revenue Recognition guidance:


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 nonpublic companies, 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. A nonpublic entity may elect early application, but no earlier than the effective date for public entities.

For companies reporting under IFRS, the new guidance will be required for reporting periods beginning on or after January 1, 2017. Early application is permitted.

The Boards noted that the period of time from the expected issuance of the guidance until its effective date is longer than usual. However, in this case the Boards decided that a delayed effective date is appropriate because of the scope of organizations that will be affected and the potentially significant effect that a change in revenue recognition has on other financial statement line items.


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WHEN WILL THE FINAL ACCOUNTING STANDARDS UPDATE BE ISSUED?

A final Update will be issued during the first quarter of 2014.


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