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Revenue Recognition Update

October 6, 2014

What you need to know about ASU 2014-09

ASU 2014-09 is the newly released accounting standard update affecting revenue recognition in all industries. The reasoning behind these changes is to reduce inconsistencies and the risk of recognizing revenue incorrectly, to reduce the options of industry-specific U.S. GAAP guides and to create a collaboration between Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) for improved and converged rules.

The FASB states, “The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue from contracts with customers.”

Luckily, the new revenue recognition model has laid out the required steps to be taken.

1) Identify the contract
2) Identify the performance obligations
3) Determine the transaction price
4) Allocate the transaction price to performance obligations
5) Recognize revenue upon the satisfaction of performance obligations

To identify the contract, there are a few things to consider. The new standard states that contracts should be combined if ownership will be gained at a point in time and contracts need to be segmented if ownership will be gained over time. Make sure the contract takes all of these into consideration and if any changes are made, all parties must be notified and approve all modifications.

To clarify the contract, performance obligation will need to be identified. There are two options here, over time or at a point in time. To be considered over time, the contract must meet the following criteria:

1) The customer simultaneously receives and consumes the benefits of the entity’s performance as the service is performed
2) The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced
3) The performance does not result in the creation of an asset with an alternative use and the entity has a right to pay for performance completed to date

If choosing at a point in time, the ownership of the project under contract will transfer once all performance obligations in the contract have been met. For performance obligations to be met over a period of time, it must be determined if this will be done depending on input (based on incurred costs) or output (based on amount completed) methods. Once decided, consistency is key. Try not to switch between input and output methods with the same customer whether there are separate contracts or not.

In order to determine steps three, four and five, it is important to understand how the product or service being provided to the customer will be recognized. Determination and allocation of the transaction price to performance obligations is based on percentage of completion outlining when fees will be paid in return of the goods or services provided. Revenue is then recognized when the performance obligation(s) have been met and the customer has received control of that good or service.

For public companies, the new regulation goes into effect on December 15, 2016 and on December 15, 2017 for nonpublic companies.

ASU 2104-09 can and should create an improved process for everyone if there is a solid understanding of how best to implement it. If you would like to speak to someone for a more extensive explanation, please contact a professional at (214) 871-7500 or http://www.LGT-CPA.com/contact.html.

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From → Accounting Tips

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