Time to implement IFRS 15 and FASB ASC 606 Revenue Recognition Standards
The time has come. Four years after the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued their converged guidance on recognizing revenue in contracts with customers, companies need to put pen to paper and implement the new revenue recognition standards. Since the new standard supersedes almost all prior revenue recognition requirements under U.S. Generally Accepted Accounting Principles (GAAP), understanding and effectively adopting the new standard is non-negotiable for CFOs and accounting professionals.
Revenue Recognition Standards Explained
The two boards adopted the new standard, IFRS 15 and FASB Topic 606, in May 2014 to address several concerns about inconsistencies in revenue recognition across different jurisdictions and industries that made it difficult for investors and others to evaluate the true value of customer contracts. As stated by the boards, the goals of the new standard include:
- Remove inconsistencies and weaknesses in the current revenue recognition literature.
- Provide a more robust framework for addressing revenue recognition issues
- Improve comparability of revenue recognition practices across industries, entities within those industries, jurisdictions and capital markets
- Reduce the complexity of applying revenue recognition requirements by reducing the volume of the relevant standards and interpretations
- Provide more useful information to users through expanded disclosure requirements
What is the New Revenue Recognition Standard?
The new standard must be applied to almost all customer contracts for the exchange of goods and services. It does not apply to leases, financial instruments, or insurance contracts.
Fundamentally, the new standard requires companies to accurately recognize revenue by depicting the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
This involves a five-step process:
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize revenue when (or as) the entity satisfies a performance obligation
In upcoming posts, we will discuss each step of this process in more detail.
When is the Effective Date for the New Revenue Recognition Standard?
There are different operative dates for application of the new standard for public and non-public companies:
- Public companies: must apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Public companies should also apply the new revenue standard to interim reporting periods within annual reporting periods beginning after December 15, 2017.
- Private companies: must apply the new revenue standard to annual reporting periods beginning after December 15, 2018. Private companies should also apply the new revenue standard to interim reporting periods within annual reporting periods beginning after December 15, 2019.
The challenges presented by the new revenue recognition standard will be different from company to company. What isn’t different is the need to adopt policies and procedures to comply with the new standard. As noted, we will be discussing the process in greater depth in future posts. In the interim, please feel free to contact us with questions or concerns or for assistance with adjusting to this brave new revenue recognition world.