The new accounting standard for revenue recognition is finally here! It’s officially referred to as ASU 2014-09 – Revenue from Contracts with Customers. FASB issued the final revenue recognition standard in May 2014. Now, after a couple of months have passed, many technical accounting sources are weighing in on the new standard’s concepts and implementation.
The foundation for the changes in revenue recognition rests in principles-based accounting, moving away from the industry specific revenue recognition rules we have been implementing for many years. For example in the tech industry, current software revenue recognition rules are rooted in SOP 97-2 (1997) and multiple deliverable rules were expanded in 2008 and 2009. According to the American Institute of Certified Public Accountants (AICPA), the new core principle for all industries is that revenue should be recognized, “to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” [i]
For privately held companies, implementation of the new revenue recognition principles is required for years beginning after December 15, 2017. Upon issuance of the standard, FASB identified a few key points:
- Additional disclosures – Required disclosures have been expanded. After all, have you ever seen a new accounting standard decrease what is required to be disclosed? Items to be included in the disclosures will include contract assets, contract liabilities, remaining performance obligations, the information on the future pipeline of revenue and the assumptions used in the accounting estimates related to these items will also need to be disclosed.
- What companies will be impacted? – Certain industries are affected more than others. As hinted above, the tech industry is definitely one of the industries affected significantly by the new standard. This is no surprise as it is one of the industries that relied heavily on industry-specific revenue guidance. The concept of VSOE for software is gone. Allocating sales price as used with multiple deliverables may still be part of the estimating process.
- How soon will we need to make changes? – FASB does not expect to change the transition date but there will be transition guidance issued. In addition, numerous resources will be available on the FASB’s website under the Resource Revenue Recognition Group.
Stay tuned for future posts discussing implementation of the new revenue principles. Also, to review other Revenue Recognition blogs written by our team, click here.