Revenue Recognition Standard Now Slated for Late May
The Financial Accounting Standards Board (FASB) had hoped to issue a final standard on revenue recognition during the first quarter of this year. However, the standard-setting organization confirmed today that the timetable for releasing the standard has been pushed back slightly.
The standard for revenue recognition is now expected to be issued in the second quarter of 2014, most likely by the end of May.
“In addition to being one of the longest standards we’ve ever issued, the new revenue recognition guidance requires updates to numerous sections of our codification,” FASB spokeswoman Christine Klimek said in an e-mail to AccountingWEB on Tuesday. “The enormous amount of production time and effort required to do this has slightly delayed its issuance.”
Six Ways Companies Could Be Impacted
In a resource provided to clients, 10Minutes on Revenue Recognition, Big Four firm PwC outlined the following six ways that companies could be impacted by the new standard on revenue recognition.
1. Compensation and bonus plans: Revenue recognition can trigger payments like bonuses. Consider how timing changes for revenue recognition affect these and other internal arrangements.
2. Contracts: Existing terms could take on new meaning under the new standard, so you may need to re-negotiate debt covenants or customer contracts to maintain the original intent.
3. Technology: You may need to update your current software to capture new information that might not have been necessary before.
4. Tax implications: The timing of cash tax payments could be affected if, for example, you recognize revenue sooner than in the past.
5. Controls and processes: The standard requires you to make more estimates and disclosures, calling for new controls and processes.
6. Investor relations: Stakeholders will want to know how your revenue recognition will change and how the new standard affects your company’s financial picture.
The FASB has been working with the International Accounting Standards Board (IASB) for more than a decade on developing a final converged standard on how revenue is recognized in financial statements for companies in all industries under both US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
According to the FASB, the new standard will replace the more than 200 specialized and/or industry-specific revenue recognition requirements under US GAAP and beef up the limited guidance that is currently provided in IFRS, especially in such areas as revenue recognition for multiple-element arrangements.
Under the proposed standard, a five-step model would be used by companies to recognize revenue from customer contracts. Those five steps include:
- Identify contract(s) with a customer.
- Identify the separate performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the separate performance obligations.
- Recognize revenue when the entity satisfies each performance obligation.
So, for example, in a multiple-element arrangement, the new standard would require companies “to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer,” according to the FASB.
Once approved, the final revenue recognition standard will be published as part of the FASB Accounting Standards Codification. The standard will likely go into effect for public companies in 2017 and in 2018 for private companies.