by Paul Mackey, CPA, JD, LLM Manager, SEC Content, Wolters Kluwer
Announced back in May 2014, these standards introduce a new model for revenue recognition from contracts with customers. The new principles-based model replaces virtually all existing U.S. Generally Accepted Accounting Principles revenue recognition guidance and applies to all entities and industries, excluding the specific scope exceptions. The FASB has stated that legacy U.S. GAAP should not be used to supplement the new guidance. While the new revenue recognition model is effective Jan. 1, 2017, for a calendar year public entity, planning for the implementation of the new model should begin now.
The Core Principle within the Standards
The issuance of these standards by the FASB and IASB is the culmination of a near decade long project to develop converged revenue recognition guidance. The FASB issued its new revenue recognition guidance in Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The IASB also issued its new revenue recognition guidance in IFRS 15, Revenue from Contracts with Customers. The core revenue recognition principle of the new rules is that revenue should be recognized to depict 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. Five steps guide the recognition of revenue:
- Identify the contract with a customer
- Identify the separate performance obligations
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize revenue when (or as) the performance obligation is satisfied
The rules apply to all contracts with customers, with certain specified exceptions, including revenue from lease contracts, insurance contracts, and contractual rights or obligations for financial instruments.
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