Yesterday, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released a new standard that gives guidance on the recognition of revenue. This effort by the FASB and IASB is one more step in bringing the U.S. financial accounting standards more closely aligned with International Accounting Standards. As the two standard become more closely aligned it will make it easier for the reader to compare financial statements of U.S. domestic corporations with foreign and international corporations.
If you have a U.S. publicly-held business, these new standards will become effective for fiscal years beginning after December 15, 2016. If you have a U.S. nonpublic business, the standards will become effective for fiscal years beginning after December 15, 2017. If you are using International Financial Reporting Standards (IFRS) now, you are required to apply the standard for reporting periods beginning after January 1, 2017.
According to two Journal of Accountancy articles issues on May 28, 2014, the new standard is expected to bring large changes to many U.S. companies. The standards require a new five-step process for companies to recognize revenue:
- Step one is to identify the contract with a customer.
- The second step is to identify the separate performance obligations in the contract.
- The third step is to identify the price associated with the transaction.
- The fourth step is to allocation the transaction price to each of the separate performance obligations in the contract.
- The last step is to recognize revenue as the entity satisfies each performance obligation.
The members of the board working on this project emphasized six important areas related to the new standard:
- Disclosures will be a big key.
- Software, telecom and real estate entities will be most affected.
- IFRS will become more rigorous.
- There will be a transition resource group that will provide more direction.
- Sales of nonfinancial assets will be represented better.
- The transition date is firm (at least for now).
This project has been in the works since the beginning of 2008. No doubt each company will need to consider the provisions of the new release and how it will affect the entities financial statements.