During 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard for revenue recognition, Accounting Standards Update (“ASU”) 2014-09. The standard defines a process for evaluating revenue recognition including 1) identify the contract, 2) identify separate performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations, and 5) recognize revenue when (or as) the organization satisfies a performance obligation. One of the key concepts in the standard is that revenue should be recognized when a customer has control over a good or service. The standard also requires an entity to enhance revenue recognition disclosures in the accounting policy footnote including both quantitative and qualitative information, significant judgments involved in the process, and the amount and timing of remaining performance obligations. The standard is effective for private companies for annual reporting periods beginning after December 15, 2018.
It is important to understand the application of the new revenue standard on contracts, however it is also important to understand the required disclosures for financial reporting. Financial reporting disclosures provide financial statement readers and users greater insight and detail in to the underlying financial data presented in the face of the financial statements.
The disclosures will continue to provide the financial statement readers needed information to understand the financial statement line item amounts, to include:
- Comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows that result from an entity’s contracts with customers (Thomson Reuters/PPC)
- Both quantitative and qualitative information are required to be disclosed for contracts with customers (Thomson Reuters/PPC)
- Significant judgments made and any changes in those judgments (Thomson Reuters/PPC), and
- Any assets recorded that are associated with the costs to obtain or fulfill a contract (Thomson Reuters/PPC)
The following bulleted items represent required disclosures under ASU 2014-09:
- Revenue recognized from contracts with customers, including an appropriate category breakdown. (Thomson Reuters/PPC)
- Contract balances, including the beginning and ending balances of receivables, contract assets, and contract liabilities. (Thomson Reuters/PPC)
- Performance obligations, including when the entity typically satisfies its performance obligations and the transaction price allocated to the remaining performance obligations in a contract. (Thomson Reuters/PPC)
- If performance obligations are satisfied over time (rather than at a point in time), the methods used to recognize revenue, such as the input or output methods utilized and how they were applied. (Thomson Reuters/PPC)
- Significant judgments and changes in judgments that are made in applying the requirements to those contracts. (Thomson Reuters/PPC)
- Significant payment terms, including any significant financing components, presence of variable consideration, and any constraints on the estimate of variable consideration. (Thomson Reuters/PPC)
- Any obligations for returns, refunds, and any warranties associated with performance obligations. (Thomson Reuters/PPC)
For more information regarding the new standard for revenue recognition, ASU 2014-09 and required disclosures, please contact a Business Assurance and Advisory member of the Keiter Real Estate and Construction Industry team.
Read more articles related to accounting considerations for Real Estate and Construction businesses on our blog.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.