The Financial Accounting Standards Board (FASB) released a new standard regarding accounting for revenue from contracts with customers. This new standard removes the industry-specific guidance for revenue and replace it with a broad framework that all companies can use.
ASU 2014-09 Revenue from Contacts with Customers (Topic 606)
On May 28, 2014, the FASB issued an ASU, Revenue from Contracts with Customers (Topic 606), new revenue standard for public and nonpublic entities reporting under U.S. GAAP. Public entity effective date annual reporting beginning after December 15, 2017, including interim reporting periods. For nonpublic entity effective date annual reporting beginning after December 15, 2018, including interim reporting periods.
FASB and IASB (the International Accounting Standards Board) worked together to issue new revenue standards that will replace most of the existing revenue guidance. IFRS 15 is the international counterpart to FASB ASC 606.
The standard may be applied in one of two ways:
- Full retrospective (all periods presented)
- Modified retrospective (beginning of period of adoption)
Currently companies recognize revenue when it is earned and realized. The application of criteria is subject to industry specific guidance.
Under the new guidance, revenue is recognized to reflect 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. Application of criteria is based on the terms of the contact with the customer.
5-Step Model to Apply to Contracts
The new standard provides a single principles-based, five-step model to be applied to all contracts with customers. The five steps are:
- Identify the contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
How to Prepare for the Transition
The new standard will have a larger effect on companies that currently follow industry-specific guidance, and companies with longer contracts with more components. Companies will have to make plans to comply with the enhanced disclosure requirements, as well.
If you have any questions regarding new revenue and lease standards and how they may impact you and your business, or require any other assistance with your tax planning and compliance needs, please call or email one of our knowledgeable team members:
Greg Hext (firstname.lastname@example.org)
Albina Albikova (email@example.com