GAIN INSIGHT

REVENUE RECOGNITION

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The new standard on revenue recognition has arrived! It's time to compare it to your company's current accounting practices.

Alert! New Revenue Recognition Standard

On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released the long-awaited new standard on the recognition of revenue from contracts with customers. The new standard is designed to replace all existing guidance on revenue recognition, including industry-specific rules included in US generally accepted accounting principles (GAAP), with an overarching, principles-based general standard.

The new steps for recognizing revenue:

  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

The devil is, of course, in the details, and in particular the notion of “performance obligations,” which is a new concept in GAAP, and the trigger for when they are “satisfied.” The standard provides more comprehensive guidance for transactions such as service revenue and contract modifications. It will also affect the way gains are recognized on the sale of real estate and other nonfinancial assets to noncustomers.

Who will this impact most?

We expect that this new standard will have a major impact on the software, construction, telecommunications, and real estate industries, among others. The standard will also require enhanced disclosures, currently viewed as less than adequate under existing guidance.

When does it take effect?

It will be effective for public companies for periods beginning after December 15, 2016, including interim reporting periods. For nonpublic companies, the standard becomes effective for annual reporting periods beginning after December 15, 2017. Early adoption is not permitted, except for nonpublic companies who may adopt as of the effective date of public companies.

This may seem like a lot of time, but be careful not to waste it. If system or contract changes are necessary, you may need most or all of the time during the grace period to prepare for implementation. In addition, prior years presented for comparative purposes will need to be restated to comply with the new rules, so most companies will want to start addressing them well before 2018.

What should you do right now?

The first step in implementation will require your finance and accounting group to gain an understanding of the new guidance and compare it to the company’s current accounting practices to see where changes will be necessary, if any. We are happy to assist you in this process in any way we can. Contact our Audit and Accounting Group with any questions.