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In Brief
For many years, FASB and the IASB sought to overhaul the guidance on revenue recognition, replacing industry-specific conventions with a common, universal approach focusing on contractual arrangements. The result, Accounting Standards Update (ASU) 2014-09, focuses on the satisfaction of contractual obligations in order for revenue to be recognized. Because retroactive application for existing contracts is required, accountants should familiarize themselves with tire implications of this far-reaching guidance in advance of its effective date. The article provides several common examples to help guide financial statement preparers through tire process.
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, the result of a joint effort between FASB and the IASB to develop a common revenue standard for U.S. GAAP and IFRS. ASU 2014-09 created the new Accounting Standards Codification (ASC) Topic 606, "Revenue from Contracts with Customers," as well as ASC 340-40, "Other Assets and Deferred Costs- Contracts with Customers." This discussion applies ASU 2014-09 to simple "plain vanilla" management services, as well as to construction and product/service contracts. ASC Topic 606 and ASC 340-40 provide more detailed explanations. Exhibit 1 reviews the terminology applicable to the new standard.
Basic Concepts
ASU 2014-09 replaces many current industry-specific revenue recognition principles with a multistep process based on the provisions of each contract. The amount of recognized revenue is the consideration to which the entity expects to be entitled as a result of the transfer of promised goods or services to customers. The timing of recognition is based upon the satisfaction of contractual obligations, rather than the type of contract or payment terms. The new revenue recognition process consists of the following steps:
* Step 1-Identity the contract with a customer.
* Step 2-Identify the performance obligations.
* Step 3-Determine the transaction price.
* Step 4-Allocate the transaction price to the performance obligations.
* Step 5-Recognize revenue when (or as) the entity satisfies a performance obligation.
ASC Topic 606 does not apply to certain contracts, such as those listed in Exhibit 2. Revenue from contracts not meeting the criteria under ASC Topic 606 should be recognized either using existing GAAP (such as lease and insurance contracts), or when the entity has no remaining obligations and has received all or substantially all of the nonrefundable...