New Revenue Standard is Here–Now WhatPosted: June 2, 2014
The FASB and IASB issued their converged revenue recognition standard on Wednesday, May 28. The 700 page document can be found here (ASC 606, Other ASC Conforming Changes, Basis for Conclusions and Implementation Guidance). While the standard is not effective until 2017, there is no time to wait to begin your implementation work on this one. If you are at a public company planning a retrospective approach you have just 7 months until you need to start computing those “prior year” amounts for your 2017 financials. You have an extra year if you are a private company and only have to report one year of comparative income statement amounts, but if you enter into long-term contracts you may already be past the time when you need to start gathering information for changes to your revenue recognition related to those contracts.
The new revenue recognition standard may be the most significant change to accounting standards in the 40 year history of the FASB. The exact impact depends on the type of business on which you report. Software, telecom and technology in general are likely to see the most significant impacts, but every type of business is likely to see some level of changes which will require new processes, new controls and possibly new accounting systems. You can see more about the changes in a Journal of Accountancy Article here. If you want to hear more about the telecom industry impact you can listen to a podcast interview of me by JOA editor Ken Tysac here.
The most significant changes in the revenue recognition standard are:
- Elimination of the contingent (cash) cap on recognizing revenue
- Deferral of all costs to obtain and fulfill a contract – this is no longer a policy election (where upfront recognition was considered “better” accounting – how ironic) and the deferral can no longer limited to the amount of revenue that you deferred
- Sales incentives that used to be considered an expense are now considered a (separate) performance obligation and must have revenue allocated to that obligation.
- Change in the hierarchy of support for “stand-alone selling price” (SSP) and the return, in some cases, of the residual method for computing SSP
I will cover each of these changes in more detail in future blogs, but in summary this standard will likely require earlier recognition of revenue and later recognition of expenses than currently allowed in GAAP. Whether that is good or bad is up to you.