The Financial Accounting Standards Board (FASB) had been hard at work for years soliciting feedback related to revenue recognition. This process resulted in the issuance of Accounting Standards Update (ASU) No. 2014-09 “Revenue from Contracts with Customers".
The new standard is effective for privately-held companies beginning January 2019.
What this means is that all companies will need to re-evaluate their revenue recognition process to conform with the new standard. The new guidance sets out to “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.” In simpler terms, this is an attempt to create a “principles-based” framework to determine the timing and extent to which revenue is recognized.
The new ASU created a five-step framework to guide companies in making this determination:
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.
With the implementation of this “principles-based” framework all former industry-specific guidance no longer applies. The AICPA has issued industry specific guidance under the new standard and will continue to do so to assist with implementation.
To comply with these new standards, a review of your contracts with customers is a must. There is a significant amount of judgement under the new standards. Consultation with your CPA regarding implementation is important as this new standard can impact bank covenants, financial ratios, etc. In addition to the initial evaluation of your contracts based on the above criteria, FMD recommends an ongoing periodic review of your contracts.
Additional Resource: Companies still find it difficult to comply with revenue recognition changes from Accounting Today