You know it’s coming. It was announced in 2014, and will take place for reporting periods beginning after December 15, 2017 (for public companies) and after December 15, 2018 (for private companies). Here’s what you need to know about the upcoming changes that will vastly change the way that your company recognizes revenue from a contract, as well as the best practices for the ramp-up period.
Background: How ASC 606/IFRS 15 Came to Be
In May 2014, FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), and the International Accounting Standards Board (IASB) issued International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers. FASB and the IASB have basically achieved convergence with these standards, with only some minor differences that will be discussed later in this brief.
FASB ASU No. 2014-09 will amend FASB Accounting Standards Codification® (ASC) by creating Topic 606, Revenue from Contracts with Customers and Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers.
Who Is Affected by ASC 606/IFRS?
According to an AICPA brief on the guidance, businesses—generally in the Aerospace, Communications, Defense, Engineering, Law, Media, Information Technology, Management Consulting, Marketing Services, and Pharmaceuticals industries—have a challenge ahead to stay up to date with the update and to properly recognize and report revenues under the new standards.
As this new standard is established, these companies will have to recognize revenue correctly or risk audits and the need to re-file earnings. The revenue recognition standard affects all entities—public, private, and not-for-profit—that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example: leases and insurance contracts).
The Five Steps of Revenue Recognition
To achieve the core principle of ASC 606, “[…] an entity should recognize revenue to depict the transfer of 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,“ an entity needs to recognize revenue by taking the following actions:
- Step 1: Identify the contract with a customer
- Step 2: Identify the performance obligations in the contract
- Step 3: Determine the transaction price
- Step 4: Allocate the transaction price
- Step 5: Recognize revenue when or as the entity satisfies a performance obligation
Learn More: The Definitive Guide to New Revenue Recognition Rules
While this standard was designed to simplify the way businesses operate, the next few years could be a tumultuous time in accounting departments. To address this, Wipfli/Brittenford has announced a new whitepaper, The Definitive Guide to New Revenue Recognition Rules, which seeks to provide readers with more background, as well as offer best practices and advice to help readers prepare for the coming standard. Read the preview below, or download the full guide here.