FASB Issues New Revenue Recognition Standard

June 2014

On May 28, 2014, the Financial Accounting Standards Board (FASB) finalized its project with the International Accounting Standards Board (IASB) to develop a common revenue recognition standard for all companies that follow U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The underlying goal of the project was to improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets and to provide more useful information to the users of the financial statements through improved disclosure requirements.

The new standard will impact any entity that enters into contracts with customers to transfer goods or services or to transfer nonfinancial assets unless those contracts are covered by other accounting standards (such as leases, insurance contracts, and certain financial instruments).

With the new standard, the FASB now provides five core principles which should be used to recognize revenue. Those core principles are as follows:

  1. Identify the contract(s) with a customer;
  2. Identify the performance obligations in the contract;
  3. Determine the transaction price;
  4. Allocate the transaction price to the performance obligations in the contract; and
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

In addition to changes in revenue recognition accounting, there are added financial statement disclosure requirements which aim to provide comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Disclosures required by the new standard include:

  1. Revenues recognized from contracts, disaggregated into the appropriate categories;
  2. Contract balances, including the opening and closing balances of receivables, contract assets, and contract liabilities;
  3. Performance obligations, including when the entity typically satisfies its performance obligations and the aggregate transaction price that is allocated to remaining performance obligations at the end of the reporting period; and
  4. Significant judgments, and changes in judgments made in applying the requirements to those contracts.

In addition to the changes on the revenue side, the new standard also provides guidance on accounting for incremental costs of obtaining a contract and some costs to fulfill a contract. If these costs meet certain criteria, they should be capitalized and subsequently amortized.

For public entities, the changes are effective for annual periods beginning after December 15, 2016. Early application is NOT permitted. For nonpublic entities, the changes are effective for annual periods beginning after December 15, 2017. Nonpublic entities may adopt the changes early, but not prior to annual periods beginning after December 15, 2016.

Once adopted, an entity must retroactively apply these new standards to all periods presented in the financial statements, either through adjusting financial amounts in all years presented, or through a cumulative adjustment in the year of application, with additional disclosures describing the impact on each financial statement line item. Given the retroactive application of this standard, it is especially important for entities with long term contracts spanning more than 3 years to act now and prepare for the transition.

For additional information and guidance on applying the new revenue recognition standards, please contact Carl Chatto or your BNN advisor at 1.800.244.7444.

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