New Revenue Recognition Standard

By Cydney Posner

Apparently, there are now 700 pages of new FASB rules about revenue recognition. Thank your lucky stars that you don't have to read them, but it's good to know that they are out there. According to this article in Compliance Week, the new rules may result in "dramatic changes that could affect accounting processes in as little as six months."

The new standard will take effect on December 15, 2016. The new standard, agreed upon by the FASB and IASB, "capped off more than a decade of research, consultation, and deliberation with the final publication of a new accounting standard for how all companies must go about determining when and in what amounts to recognize revenue." The rule is designed to increase comparability across industries and capital markets and enhance disclosure. Apparently, companies in software, telecom, real estate, and some aspects of asset management will experience the greatest change.

According to the article, the "idea behind the development of the standard was to create a single model under which companies would report the nature, timing, and any uncertainty on revenue. The model requires companies to follow a five-step process for deciding when and in what amounts to recognize revenue. It begins by identifying a contract with a customer, identifying the performance obligations under the contract, determining the transaction price, allocating the price to any separate obligations that might be contained in the contract, and then recognizing revenue for each performance obligation as each obligation is fulfilled." As a result, where contracts contain multiple performance obligations, "the accounting could change significantly."

While the new standard does not become effective until December 15, 2016 (so it will be applied by calendar-year companies for their 2017 reporting years), companies are being urged to begin thinking soon about implementation. For example, companies will need to assess "whether they currently capture the information they will need to comply with the new standard, both the accounting and the disclosures, and determine if new systems will be necessary." Then they will need to determine whether to elect a retrospective approach, applying the standard to both current and prior years (e.g., 2016 and 2015 revenues in addition to 2017) or to take the cumulative approach, applying the standard only to 2017, which would involve some adjustments to deferred amounts as well as disclosures regarding the absence of comparability. Among the factors to be considered are the views of financial statement users and analysts, the approaches adopted by peers, and the cost and complexity of providing the full retrospective view. Commentators observed that the new standard will also "have implications for the sales process, information systems, internal controls, taxes, debt covenants, and potentially even compensation…." Given that it's now the middle of 2014, companies adopting a retrospective approach would need to move quickly to be ready for 2015.

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