Understanding the New Revenue Recognition Standard
Contributed by: Shauna Brown, Partner, CPA
The revenue recognition standard utilizes a combination of accrual accounting and matching principles to define the specific parameters under which revenue is recognized. In recent years, the Financial Accounting Standards Board (FASB) realized the need to unify fragmented revenue recognition guidance. The resulting Accounting Standards Update No. 2014-09 – revenue from contracts with customers (Topic 606) establishes principles surrounding the nature, timing, and uncertainty of revenue from contracts with customers to properly report valuable data to financial statement users.
The new guidance should be applied to annual reporting periods beginning after December 15, 2017 for public companies and after December 15, 2018 for nonpublic companies.
The new revenue recognition standard:
- Eliminates potential inconsistencies and compromises with existing revenue requirements
- Promotes enhanced flexibility to resolve revenue issues
- Strengthens revenue recognition comparability across multiple corporate entities, industries, dominions, and markets
- Delivers more meaningful intelligence to users of financial statements through elevated disclosure mandates
- Streamlines financial statement preparation by lowering total number of requirements to which an organization must refer
Navigating The New Revenue Recognition Guidelines
To maintain compliance with the new revenue recognition principle, non-public companies should apply five specific steps, including:
Identify The Contract With A Customer
The standard defines a customer contract as an agreement (written, oral, or with other customary practices) that creates enforceable rights and obligations.
Identify The Performance Obligations In The Contract
A performance obligation is a promise within the contract for the transfer of goods or services. Within a single contract, there could be one or several performance obligations.
Determine The Transaction Price
The transaction price details the compensation an entity is entitled to in exchange for the transferring of any promised goods or services, excluding sales tax or other amounts collected on behalf of a third party.
Allocate The Transaction Price To The Performance Obligations
An entity is required to designate the standalone transaction price to which the entity will be compensated for completing each performance obligation.
Recognize Revenue When The Entity Satisfies A Performance Obligation
As each performance obligation is satisfied, the business entity can begin to recognize the generated revenue. The biggest consideration during this step is determining if an obligation is satisfied at a designated point in time or over an extended period of time.
Not sure about how to apply the new revenue recognition standard to your business? Contact Leone, McDonnell & Roberts to consult with one of our experienced, licensed, and certified accountants today.