In May 2014 the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606), with the objective to develop a single, principle-based revenue standard for US GAAP and IFRS. The goal is to improve accounting for contracts with customers by providing a framework for addressing revenue issues as they arise, increase comparability across industries and markets, and improve revenue disclosures within the financial statements.
What are some of the major provisions of this new update? What are the differences from the current standards? When is it effective? What do I need to do now in order to help ease the transition?
New Provisions
The update requires companies to use a 5 step process in recognizing revenue with customers:
- Identify the contract(s) with a customer
- Identify performance obligation(s) in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies a performance obligation
Revenue should be recognized to show the transfer of goods or services in an amount that reflects the consideration to which the entity expects to be entitled.
This guidance applies to all contracts with customers, except:
- Financial instruments
- Insurance contracts
- Lease contracts
- Guarantees
- Non-monetary exchanges in the same line of business to facilitate sales to customers
In addition, certain contracts that are not with customers are excluded. This includes contribution transactions and collaborative arrangements.
Update vs. Current Guidance
The major changes when comparing the update to current guidance include the following:
- The primary focus is now on the contract rather than on different types of transactions.
- Updates to revenue recognition for licenses, including clarification on satisfaction of performance obligations.
- Applying guidance to transfer/sales of non-financial assets to non-customers.
- Guidance on accounting for costs to obtain and fulfill a contract with a customer (if not addressed in other topics).
- Updates to disclosure requirements in financial statements.
- Disaggregation of revenue
- Additional disclosures on contract balances.
- Remaining performance obligations.
- Additional interim disclosures for public companies.
Effective Dates
For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2017. For nonpublic entities, the guidance is effective for annual reporting periods beginning after December 15, 2018. Early application is permitted, but no earlier than the original effective date of periods beginning after December 15, 2016.
Practical Steps for Implementation
- Read the update and attend related CPE courses.
- Assign employees to become subject matter experts who can provide internal training. Include employees outside of accounting: internal audit, legal, etc.
- Compile a list of revenue categories – categorize by contract types, if possible.
- Develop and document the company’s policy on each revenue category.
- Support your position and discuss with external auditor.
- Consider discussing your approach and issues with similar companies.
- If a change is required, assess materiality.
- Discuss impact with auditors and potentially continue with prior recognition model.
- If a change in recognition is required, consider the impact on the following:
- Are changes required in wording of new contracts?
- Recognition and technical changes in accounting system.
- Changes in monthly close process.
- Internal financial reporting.
- Audited financial statements.
- Communicate changes to CFO, board, audit committee, legal counsel, external auditors, internal auditors, contract signers, banks, etc.
- Determine requirements to retrospectively adopt the new standard or prepare comparative financial statements, noting that it may be necessary to restate prior year.
For more information on these changes, contact Kyle Robbins today.