It’s been almost three years since the FASB and the International Accounting Standards Board changed the guidelines for recognizing revenue. Since you already know how important revenue is, you’re still maybe new to the updated guidance if working with contracts for the first time.
Previously, the Generally Accepted Accounting Principles (GAAP) were far too complex to understand. GAAP also required specific research because they had specialized guidelines for various industries. For instance, software and real estate companies often use different accounting methods from others.
Those of you starting to adhere to the new guidance have a better way to use GAAP and in bringing more clarity to contracts with customers.
The differences between the old GAAP revenue recognition methods and the new ones are wide, so here’s a look at what those are.
Consistent Principles for Recognizing Revenue Across Industries
Through the old GAAP principle, the requirements for recognizing revenue were long and overly protracted. Not only did this require individual principles for different industries, you also had different requirements based on geography.
With the revised GAAP, it now gives you consistent revenue recognition regardless of industry or where you work in the world. As such, it’ll save you downtime from trying to figure out your rev rec rules during busy times.
More Thorough Disclosure Requirements on Contracts
Previously, most companies and reporting organizations provided limited information about contractual agreements. This could lead to a lot of discrepancies or even confusion about revenue involved. Despite the old GAAP requiring reporting for accounting policies, revenue contracts had a blank spot for a long time.
Under the new guidance, you’ll have to adhere to a new set of disclosure requirements related to customer contracts. It requires far more thorough detail to prevent financial disputes and to safeguard from any potential legal issues.
When everyone knows what’s involved in a contractual agreement, you save yourself from expensive litigation to resolve things.
Determining Performance Obligations
Providing goods and services through a contract was an evasive practice before the new guideline took effect. Prior to the change, many services you provide didn’t always get recognized as revenue-generating transactions.
As you can see, this could sometimes create confusion in contracts if a service provided meant a separate obligation. Through the new guidance, you’ll now have to recognize all goods and services you provide in your contract. Plus, you need to recognize ones actually generating revenue.
Now you’ll provide more clarity for customers without unpleasant surprises in charging for something not in the contract.
Allocating Transaction Price
For more specificity, the new guideline now requires you to indicate the exact individual transaction price for all goods and services. With this new principle, it’s clearer on what each service costs rather than just providing a standalone total.
Discounts or variable amounts need reporting as well to again avoid disputes about contract language. For the customers, this makes itemizing each service easier, as well as getting in writing any discounts you provide.
A Single Model for Variable Considerations
Rather than have variable considerations for separate things like rebates, or discounts, the new guideline provides a single model for all.
This means variable consideration is now included in the transaction price for things like discounts, bonuses, or possible returns. It’s a safeguard in the chance you have to reverse the amount of revenue recognized due to various circumstances.
Overall, the new guideline is going to simplify how you prepare financial statements in the future to streamline financial management. Take some time to study the new guidelines so you see how much it’s going to help you, no matter what your industry is.
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