What are your plans for adopting the new revenue recognition accounting rules?
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-09”). The rules prescribed by ASU 2014-09 will provide a common revenue recognition model for all entities across all industries. Previous revenue recognition guidance consisted of a blend of general concepts and industry-specific guidance, which sometimes resulted in different accounting for economically similar transactions. Also, the FASB worked jointly with the International Accounting Standards Board on this revenue recognition project so that entities reporting under US Generally Accepted Accounting Principles and entities reporting under International Financial Reporting Standards will apply a common revenue recognition model.
In a nutshell, the new revenue recognition rules require an entity to determine its revenue recognition policy by assessing the following items:
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 in the contract; and
Recognize revenue when (or as) the entity satisfies a performance obligation.
ASU 2014-09 also requires entities to capitalize incremental costs of obtaining or fulfilling a contract with a customer that the entity expects to recover. The asset shall be amortized and will be subject to impairment testing. Many entities will also be subject to the disclosure requirements provided by ASU 2014-09.
What Steps Should Be Taken to Adopt ASU 2014-09?
Entities will need to perform a deep dive into its arrangements with its customers and the requirements of ASU 2014-09 to ensure the revenue recognition model is being appropriately applied to the facts and circumstances specific to the entity. In order to ensure an entity’s revenue recognition accounting policy is compliant with the requirements of ASU 2014-09, the entity should provide enough lead time to:
Read ASU 2014-09 and gain a firm understanding of the requirements;
Understand its various arrangements with customers and determine whether the arrangements meet the definition of a contract provided by ASU 2014-09 and are therefore within the scope of this standard (vs. another standard);
Understand the performance obligations within the contract to identify which performance obligations are distinct and should recognize revenue separately, and which performance obligations should be combined with other performance obligations and recognize revenue on a combined basis;
Understand the transaction price and how variable consideration, financing components, noncash consideration, and consideration payable to the customer, if any, should be accounted for under the model;
Understand how the transaction price will be allocated to each performance obligation including how discounts and variable consideration will be allocated to each performance obligation. An entity should also understand typical contract modifications that are made with its customers and how those contract modifications will be treated under ASU 2014-09;
Understand when revenue will be recognized for each performance obligation by determining whether the performance obligation is satisfied as of a point in time or over time. If the performance obligation is satisfied over time, the entity must determine which method permitted by ASU 2014-09 is most appropriate for recognizing revenue;
Understand which costs to obtain or fulfill a contract with a customer will be required to be capitalized and amortized rather than expensed as incurred; and
For certain entities, understand the data that will need to be captured to meet the disclosure requirements.
Once an entity’s new revenue recognition policy is determined in accordance with ASU 2014-09, then time will be needed to implement any changes resulting from the new policy.
When is the New Guidance Effective?
The new revenue recognition guidance is effective for pubic business entities, not-for-profit entities and certain employee benefit plans for annual periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 31, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early application is permitted with some restrictions.
Do you need help analyzing arrangements with customers, interpreting the new guidance provided by ASU 2014-09 and writing a revenue recognition policy? Call Intact Solutions Group LLC for assistance.