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The Financial Accounting Standards Board. (FASB) and the International Accounting Standards Board (LASB) jointly issued anew revenue recognition standard, Revenue from Contracts with Customers, in May 2014, after more than six years of meetings, deliberations, and drafts. This new standard, effective for public companies for annual and interim periods beginning after December 15,2016, and December 15, 2017 for nonpublic companies, provides guidance for helping companies recognize revenue under both U.S. Generally Accepted Accounting Principles (GAAP) and international Financial Reporting Standards (IFRS) and will supersede nearly all existing revenue guidance. The standard will be included in FASB's Accounting Standards Codification as Topic 606 and in IFRS as IFRS 15.
The new standard provides a single, comprehensive accounting model for revenue recognition as well as a more robust framework for addressing revenue issues. Its goal is to provide consistent principles for revenue recognition, regardless of industry or geographic region. It streamlines and simplifies current guidance, and removes the industry''- and transaction-specific guidance from existing U.S. GAAP. Consequently', the new standard will require companies to make more estimates and use judgment more often than under the current guidance.
The guidance requires enhanced financial statement disclosures intended to provide more useful, comprehensive information concerning the nature, amount, timing, and uncertainty' of revenues and cash flows resulting from contracts with customers. Although the standard's impact will vary, some companies might experience significant changes in revenue recognition and, as a result, may' need to make significant changes to existing policies and processes in order to capture and justify' decisions made regarding revenue recognition and measurement.
Core Principle: Recognition and Measurement
The standard's core principle requires that entities recognize revenue when control of promised goods or services is transferred to customers in an amount that reflects the consideration the entity' expects to receive in the exchange (ASC 606-10-10-2). Control refers to the ability to direct the use of and obtain substantially' all of the remaining benefits from the asset. Each performance obligation (i.e., each contractually' distinct promise to transfer goods or sendees) can be satisfied and, hence, can transfer either over time or at a point in time.
The standard can be applied using a five-step process to analy'ze revenue transactions and guide revenue recognition decisions. The following discussion describes each of...