Revenue recognition

In November 2013, the FASB and IASB completed redeliberations on their joint standard on revenue recognition. The final standard is intended to increase the consistency of revenue recognition across industries and capital markets and will affect most entities that apply U.S. GAAP or IFRS. Entities that currently follow industry-specific guidance should expect the greatest impact. The final standard is expected in the first half of 2014.

Key developments

  • The FASB and IASB concluded substantive redeliberations of their 2011 exposure draft. The proposed standard is intended to provide a consistent revenue recognition approach that will increase financial statement comparability across companies and industries.

  • The proposed standard would apply 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 that are in the scope of other standards will be separated and accounted for under those standards..

  • Separate contracts would be combined if they were entered into at or near the same time with the same customer (or related parties) and either the contracts were negotiated as a package with a single commercial objective, the amount of consideration in one contract is dependent on the performance of the other contract, or they form a single performance obligation.

  • Performance obligations would be accounted for separately if they relate to goods or services that are capable of being distinct from other goods or services promised in the contract, and the goods or services are distinct within the context of the contract because they are not highly dependent on, or highly interrelated with, other promised goods or services in the contract. A good or service is distinct if the customer can benefit from the good or service on its own or with resources readily available to it. Otherwise distinct performance obligations may be combined and treated as a single performance obligation if they are not distinct in the context of the contract, meaning they are highly dependent on or interrelated with other promised goods or services in the contract.

  • 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, and includes an estimate of variable consideration that is subject to a constraint. The variable consideration would be limited to an amount not subject to significant reversals in the future based on the entity’s experience with similar arrangements. The transaction price will also reflect the impact of the time value of money if there is a significant financing component present in an arrangement.

  • Revenue would be 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.

What's next

  • A final standard is expected in the first half of 2014. The IASB’s standard will be effective for the first interim period within annual reporting periods beginning on or after January 1, 2017, while the FASB’s standard will be effective for public entities for the first interim period within annual reporting periods beginning after December 15, 2016 (private companies have an additional year). The FASB’s standard will prohibit early adoption for public entities, while the IASB will permit it. An entity can apply the new revenue standard retrospectively, including using certain practical expedients. An entity can alternatively choose to recognize the cumulative effect of applying the new standard to existing contracts in the opening balance of retained earnings on the effective date with proper disclosures.
 

10Minutes

10Minutes on revenue recognition

3/19/14 | Assurance services

After much deliberation, the FASB and IASB are set to release a final global revenue recognition standard in the coming months that will do away with current industry-specific accounting and instead apply a single set of principles to all revenue transactions. Changes to practices, processes and systems could ripple through your business. Read about the standard as well as insight into ways in which some companies are preparing for the broader impact. Read more

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