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What are the New Revenue Recognition Rules?

by | Nov 21, 2016

New Revenue Recognition Rules

Right now we’re going to discuss the new Financial Accounting Standards Board (FASB) rules for revenue recognition related to contracts with customers. The new rules generally affect reporting periods on and after December 15, 2016 so at this point your organization should find itself in the thick of gathering data and understanding how addressing the new rules will affect your business. When the discussion’s done, you’re just going to have to ask yourself what you think about it. Let’s get started with discussing the basics of the new Revenue Recognition Rules.

Where does the rule come from?

FASB issued the new rules in 2014 in its Accounting Standards Update (ASU) No.2014-09 appropriately entitled, “Revenue from Contracts with Customers.” The International Accounting Standards Board (IASB) also issued its International Financial Reporting Standards (IFRS) 15, entitled “Revenue from Contracts with Customers.”

The American Institute of Certified Public Accountants (AICPA) subsequently published its AICPA “Financial Reporting Brief: Roadmap to Understanding the New Revenue Recognition Standard” which discusses the differences between the FASB and IASB guidance.

Who does the new rule affect?

The new revenue recognition rule affects all public, private, and non-profit organizations that have contracts with customers. The type of contracts include leases, insurance contracts, most financial contracts, software subscriptions, maintenance & support, and guarantees that are not service or product warranties.

How does the rule change GAAP?

According to the AICPA Financial Reporting Brief, the new revenue recognition rule does away with the Generally Accepted Accounting Principles (GAAP) revenue recognition guidance based on transaction and industry-specific rules. The new rules rely instead on a principle approach.

When is the new rule effective?

The answer to this question is not simple. The new revenue recognition rules originally were effective with respect to public entities for annual reporting periods that began on and after December 15, 2016 (including interim reporting periods within that period).

The new rules originally were effective for all other organizations for reporting periods that began on and after December 15, 2017 and for interim reporting periods on an annual basis on and after December 15, 2018.

In August 2015, FASB issued a one-year deferral date in ASU No. 2015-14, entitled “Revenue From Contracts with Customers–Deferral of the Effective Date.” FASB intended the delay in the effective date would provide organizations with the time they needed to execute new systems and gather data.

All other organizations must comply with the new guidance for reporting periods that begin on and after December 15, 2018 and with respect to interim reporting periods on an annual basis on and after December 15, 2019.

Companies desiring to do so, may apply the new FASB revenue recognition rule as of the original effective dates.

The IASB deferred its IFRS 15 effective date one year to 2018, although companies can opt to apply the earlier effective date.

So what is this historic change?

The new revenue recognition rule reflects the principle that organizations should recognize revenue in a way that shows the transfer of goods or services to the customer in the amount that your organization expects payment for the goods or services. To state it another way, your organization should review its customer contracts, separate the obligations in each contract, determine the transaction price, and allocate that price to each obligation under the contract. Under the new rules, you will recognize revenue as you satisfy each contractual obligation and your customer gains control over the product or service.

How should your organization approach the new rule?

The AICPA Roadmap calls the new revenue recognition guidance “game-changingand “historic”. The rule will impact financial statements as well as information system processes, risk monitoring, contracts, financial agreements, earnings statements, taxes, tax liabilities, and legal issues. You will also want to train your staff in the new revenue recognition standards so that your move to the new rules will show skillful deployment. You may also need to upgrade technology in order to make your process more efficient and to handle the amount of data that you will need to manage. As executives, we need to take the time to understand how the new rules will affect revenue and earnings and financial statements.

To learn more about the revenue recognition rules, read the article from October 2016 on financialexecutives.org entitled “Countdown to IFRS Doomsday: The Road to Revenue Recognition.”

To talk more about this, or anything else, please contact us. We look forward to answering any questions you may have.