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Revenue recognition issues
The new revenue standard significantly affected the revenue recognition practices of most companies. Access PwC resources and insights on ASC 606, the new revenue standard.
Effective date and what is changing
- Sweeping changes in the FASB’s new revenue recognition model became effective Q1 2018 for most calendar year-end public business entities (PBEs) and 2019 for non-PBEs.
- The new standard is aimed at reducing or eliminating inconsistencies across industries and between US GAAP and IFRS that existed under the prior revenue recognition guidance (the IASB published its new revenue standard in 2014).
- The FASB’s new model, codified in ASC 606, Revenue from contracts with customers, applies to a company's contracts with customers, except for contracts that are within the scope of other standards (e.g., leases, insurance, financial instruments). Elements of contracts or arrangements that are in the scope of other standards (e.g., leases) are separated and accounted for under those standards. The unit of account for revenue recognition under the new standard is a performance obligation (a good or service). A contract may contain one or more performance obligations.
Performance obligations are accounted for separately if they are distinct. A good or service is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and the good or service is distinct in the context of the contract. Otherwise performance obligations are combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct.
The transaction price is allocated to all the separate performance obligations in an arrangement. It reflects the amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services, which may include an estimate of variable consideration to the extent that it is probable of not being subject to significant reversals in the future based on the entity’s experience with similar arrangements. The transaction price also reflects the impact of the time value of money if there is a significant financing component present in an arrangement. The transaction price excludes amounts collected on behalf of third parties, such as some sales taxes.
Revenue is recognized when an entity satisfies each performance obligation by transferring control of the promised goods or services to the customer. Goods or services can transfer at a point in time or over time depending on the nature of the arrangement. Specific criteria are provided for when a performance obligation is satisfied over time.
The incremental costs of obtaining a contract are capitalized if the costs are expected to be recovered. Costs incurred to fulfill a contract are capitalized if they are not covered by other relevant guidance, relate directly to a contract, will be used to satisfy future performance obligations, and are expected to be recovered.
Effective date: As amended, the FASB's standard became effective in 2018 (including interim periods therein) for most calendar year-end public business entities (PBEs). For most calendar year-end non-PBEs, the new standard became effective in 2019 and will be effective for interim periods in 2020 for those companies.
The IASB’s standard, as amended, became effective in Q1 2018 for calendar year-end companies.
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