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Revenue Recognition: A Change in Professional Standards Part I

Part 1 

ASU 2014-09 Revenue from Contracts with Customers (Topic 606)

The FASB has been working on modifying the current revenue recognition model for several years in an attempt to converge GAAP and the international standards of accounting.  The objective is to remove inconsistencies, provide a framework for addressing revenue issues, improve comparability and disclosures, and to simplify the preparation of financial statements.  Part 1 is a general overview of the new standard. Future articles will address more of the details in the application of the revenue recognition changes.

 

Effective Dates:

-Public Entity – annual reporting periods beginning after December 15, 2017

-Nonpublic Entity – annual reporting periods beginning after December 15, 2018

 

Adoption:

-Full retrospective (all prior periods presented) or

-Modified retrospective (beginning of period of adoption)

-Early adoption allowed but not prior to annual periods beginning after December 15, 2016

 

Scope:

All contracts with customers to transfer goods or services –includes transfer of nonfinancial assets; including sales of property and equipment, real estate, intangible assets (unless in the scope of another standard)

Most current revenue recognition guidance is superseded; including 180 industry-specific rules

 

Scope Exceptions:

-Health care entities – contributions from fundraising entities and charity care

-Not-for-profit entities – contributions

-Lease contracts

-Insurance contracts

-Financial instruments

-Guarantees

-Non-monetary exchanges between organizations in the same line of business to facilitate sales to customers

 

Core Principles:

New – Recognize revenue to depict the transfer of promised goods or services to customers in an amount which the entity expects to be entitled in exchange for those goods or services

Current – Recognize revenue when it is earned and realizable

 

Effect on you or your Company?

-Less if simpler business-to-consumer sales

-Larger if currently following industry-specific guidance, companies with longer contracts and more components and companies with significant variable consideration

All companies will have to deal with the enhanced disclosure requirements and all companies will have to analyze and apply the new revenue guidance to their business.

 

Conclusion:

Although the effective date seems like a long way away, the planning for this change will be critical.  The new standard may have a significant impact on what your financial statements will look like compared to how they look today.  There also may be some significant changes to the Internal Revenue Code, which is currently under consideration by the IRS.