In order to fully appreciate the implications of the new revenue standards it is helpful to understand the process which led to the changes.
Over the past decade, the Financial Accounting Standards Board (FASB), which establishes generally accepted accounting principles in the United States of America (US GAAP), and the International Accounting Standards Board (IASB), which establishes generally accepted accounting principles for over 100 adopting countries (International Financial Reporting Standards or IFRS), embarked on a joint project to develop criteria for revenue recognition and reporting that would accomplish key goals, including, but not limited to:
While the final standards issued by the FASB and the IASB were not fully converged, many of the major principles in the standards are now more closely aligned than they were under legacy US GAAP and IFRS. Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, and related subsequent amendments (collectively, the new revenue standards) provide guidance on both how revenue should be recognized by organizations and disclosed to stakeholders in financial statement footnotes.
How will revenue recognition diverge from current guidance under the new standards?
Under the new five-step approach required by ASU 2014-09, focus is placed on gaining a holistic understanding of contract elements and terms and disclosing this information to financial statement users.
When contracts include variable consideration or provide the customer with both a good and a service, an entity’s evaluation of how and when consideration is earned will require careful assessment. Currently, contracts are often tracked at the contract level, once the new standards are in place, tracking may be necessary at either a disaggregated level that corresponds to identified performance obligations and associated transaction prices in the contract, or at an aggregate level with other contracts. Furthermore, contracts that include warranty provisions or options to purchase additional physical goods or services will need to be analyzed to identify potentially distinct performance obligations.
While contracts receive considerable focus under the new standards, substance will continue to take priority over form, as the FASB did not want entities to manipulate contracts in order to achieve preferred accounting conclusions. With that said, contract pricing may begin to shift as the new standards are implemented, in order to facilitate alignment of the point at which customers are billed and the point at which revenue is recognized.
How will industry-specific situations be treated under the new standards, now that prior guidance is being replaced by principles-driven fundamentals? Where can my entity find additional information?
The shift away from detailed, proscriptive industry guidance has left many in positions of financial reporting responsibility wondering how they can best comply with the new standards, while also remaining aligned with industry practice.
While the FASB and the IASB worked to provide guidance with applicability across industries, as soon as the finalized core standard was issued, 16 revenue recognition task forces were established by the AICPA to address potential industry-specific issues that were either not addressed or ambiguous in the capstone guidance. The industries involved in the project include aerospace and defense, construction contractors, hospitality, not-for-profits, software, and telecommunications, among others.
Industry-specific questions have been identified by the task forces which are then reviewed by the AICPA’s Revenue Recognition Working Group (RRWG) and Financial Reporting Executive Committee (FinREC), as well as the FASB’s Transition Resource Group (TRG), where applicable. More information regarding the revenue recognition implementation issues that these groups have identified and discussed is posted regularly on the AICPA Revenue Recognition Resource Center and the FASB Revenue from Contracts with Customers Project Update.
Coming up next
The next post in this ongoing series will highlight allowable transition methods, elements of the standards that should be considered in current contract negotiations, and critical actions that should be taken immediately. In the following months, we will explore the five key elements of the new revenue recognition criteria in more detail.
For further information on the revenue recognition standards or questions on how your organization can transition to the new standards, contact Rachel Plumley at 301.231.6200 or email@example.com, or Philip Steigner at 301.231.6200 or firstname.lastname@example.org. Stay tuned for future posts.