On the Horizon: Revenue Recognition
by Lee Byrd
On May 28, 2014, Financial Accounting Standards Board’s (FASB) released Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU replaces more than 600 pieces of current revenue recognition guidance with a five-step model. Under the current guidance, entities recognize revenue when earned and realizable. Under the new ASU, entities will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As such, the application of the revenue recognition criteria is based on the terms of the contract with the customer rather than on industry specific guidance. The standard requires entities to make more estimates and use more judgment than current guidance.
The five-step model is as follows:
Step 1 – Identify Contracts with Customer
Step 2 – Identify Performance Obligations
Step 3 – Determine Transaction Price
Step 4 – Allocated Transaction Price to the Performance Obligations
Step 5 – Recognize Revenue When (or as) Performance Obligations are Satisfied
The standard becomes effective for public and private companies in 2017 and 2018, respectively. Early adoption is not permitted for public companies. While this gives entities time to become familiar with the new guidance, entities will need to use this time wisely to analyze the cost and benefits of the two approaches to implementation. Entities can choose the full retrospective method, which requires that the standard be applied retrospectively to each prior reporting period presented, or the modified retrospective method, which allows the cumulative effect of initially applying the update recognized at the date of initial application with disclosure of the amount by which each financial statement line item is affected in the current year. If the full retrospective method is chosen, the ASU allows some practical expedients to be used during implementation.
Langdon & Company LLP can provide further information or assist with implementation of ASU 2014-09. Please contact our office for more information.
Lee ([email protected]) is an audit manager focused primarily on single audit procedures associated with healthcare clients.