New AICPA Revenue Recognition Standards
Originally published on August 9, 2016
Updated on October 30th, 2023
Revenue is often used by investors to measure whether a business or organization is successful. So it stands to reason that revenue recognition – the point at which income is officially seen as revenue in your financial records – must be documented consistently and within established standards.
But revenue recognition for contracts with customers can get tricky. Previously industries often had their own specific criteria to define revenue, leading to varying accounting practices for the same types of transactions.
So in May 2014, the FASB (the Financial Accounting Standards Board) issued an update in their reporting standards for revenue recognition from contracts with customers (“the new standard”). Instead of basing their guidelines on specific transactions and industries, they adopted a principle-based approach with the following objective:
The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers.
Under the new standard, revenue recognition will be achieved by applying the following five steps from FASB:
- Identify the contract with a customer.
- Identify the performance obligations (promises) in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the reporting organization satisfies a performance obligation.
What Do You Need to do Now?
Although the FASB is still working through implementation issues, we do know that the structure of your contracts may impact when revenue is recognized, particularly when it comes to distinct goods or services and the transfer of risk. For performance obligations satisfied over time, the associated revenue is recognized over time by selecting an appropriate method for measuring the progress toward complete satisfaction of the performance obligation. We therefore urge you to gain an understanding of your current contracts with customers and begin planning and discussing your proposed updates with your CPA.
The AICPA also recommends a four-step roadmap that you can start following to ensure compliance to the new standard:
- Understand the changes to current GAAP based on FASB ASU No. 2014-09, Revenue from Contracts with Customers.
- Understand transition and retrospective adoption of the revenue recognition standard, and determine how your company will adopt the new guidance.
- Find resources to help train your professional staff to ensure effective and efficient implementation of the revenue recognition standard.
- Educate users about the changes they can expect in your company’s financial statements.
What Else is Changing?
The new standard also includes disclosure requirements regarding revenues that will make financial statements clearer and more useful to the users of the financial statements. The standard affects all public and private entities that have contracts with customers, with exceptions for certain leases, insurance, financial instruments and guarantees other than product or service warranties (these exceptions are accounted for under other FASB standards).
The adoption requirements of the new standard differ between public and nonpublic entities:
- Public entities must adopt the new standard for reporting periods beginning after December 15, 2017. Early adoption is not permitted.
- Nonpublic entities must adopt the new standard for reporting periods beginning on or after December 15, 2018. There are several variations of early adoption available to these entities.
Important – Stay Tuned!
The new standard has been a long time coming because of its significance to industries such as construction, software and real estate. Please be aware that the FASB is currently working through several identified implementation issues and will release more details in the coming months. In the meantime, the AIPCA has set up a web page with information and resources regarding the new standard.
We will post updates as more information becomes available, and we will also conduct a webinar in the fall once FASB publishes additional information on the standard.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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