Revenue Recognition - Finally Issued

Posted on 06.23.14

Author: Matthew O. McDonald, CPA/CFF, CFE | Partner | Manufacturing Industry Team

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working on revised standards for revenue recognition for more than 10 years including several public exposure drafts.  The final standard was issued on May 28, 2014.  The standard consists of three parts:

Section A - Summary and Amendments That Create Revenue from Contracts with Customers and Other Assets and deferred Costs  - Contracts with Customers (156 pages)

Section B - Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables (357 pages)

Section C - Background Information and Basis for Conclusions (193 pages)

This standard is one of the issues that the FASB and IASB identified as an area that needed convergence on treatment. This convergence has resulted in "principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers." By addressing this issue, FASB believes the guidance:

  • "Removes inconsistencies and weaknesses in existing revenue requirements
  • Provides a more robust framework for addressing revenue issues
  • Improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets
  • Provides more useful information to users of financial statements by reducing the number of requirements to which an organization must refer."

The standard establishes the following as the core principle surrounding revenue recognition:

"Recognize revenue 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."

To achieve this core principal, it is believed that organizations will need to perform the following steps:

Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations (promises) in the contract
Step 3: Determine the contract price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when (or as) the reporting organizations satisfies a performance obligation

The standard also identifies disclosure requirements to report comprehensive information to the users of the statements including information on the nature, amount, timing and uncertainty of revenue and cash flow arising from reporting organization's contracts with customers.

This standard is effective for public organizations for annual periods starting after December 15, 2016 and nonpublic organizations for annual reporting periods starting after December 15, 2017. Early adoption is not permitted for public organizations and is allowed for nonpublic organizations as early as permissible for public entities. The delayed effective dates were made as FASB believes the adoption of the standard may have "significant" effects on an organization's financial statements.

As this guidance has just been recently released, it is still being analyzed with additional implementation guidance planned to be issued. However, as indicated, this standard may have a significant impact on your financial reporting. Due to its complexity, time will be needed to evaluate its impact on your organization.

Questions? Contact your Keiter representative or information@keitercpa.com | 804.747.0000

Posted by: Matthew O. McDonald, CPA/CFF, CFE

Matt has over 20 years in public accounting providing audit, tax, consulting services, and financial forensic investigations for a variety of businesses, including multi-state privately held businesses and companies with single location operations. Areas of specialization include the multi-family housing industry, real estate, construction, not-for-profit organizations, retail, and manufacturing clients. Read more of Matt’s accounting insights on our blog.