More than a decade in the making, a new accounting standard for how to recognize revenue in financial statements is a reality, giving all companies a new roadmap for how to determine when it is appropriate to recognize revenue.

The Financial Accounting Standards Board and the International Accounting Standards Board have published their long-awaited converged standard on revenue recognition, producing a global approach for  all companies regardless of whether they report under U.S. or international accounting rules. “It is a monumental step having a converged revenue recognition standard,” says FASB member Marc Siegel. “No matter where you are in the world, or what industry you work in, you will look at revenue the same way. This is an important reduction in complexity.”

The new standard replaces hundreds of pieces of detailed historical accounting pronouncements in U.S. Generally Accepted Accounting Standards and a handful of guidance in International Financial Reporting Standards to produce a single, global approach under both systems of accounting. The U.S. rulebook was considered overly prescriptive and at times conflicting, while the IFRS standard was seen as inadequately brief, leading to different accounting for transactions that were economically similar. FASB and IASB agreed in 2002 to work together to write a new standard that would converge the two rulebooks to make the recognition of revenue consistent across all entities regardless of which standards they follow.

The new standard requires companies to follow a five-step process to determine when and how to recognize revenue. It begins with identifying the contract that a company has with a customer, identifying the performance obligations, determining the transaction price, allocating the price to any separate performance obligations contained in the contract, then recognizing revenue as each performance obligation is met or delivered to the customer. “Revenue will fall out from applying that approach,” says Siegel. “For certain transactions, the accounting might not be any different from what it is today. For example, cash transactions in a retail environment probably won't change the accounting outcome. But the thought process is different. It's not about the earnings process being complete. It's about the assets and liabilities and when control transfers from the seller to the customer.”

The new standard also prescribes some accounting for the costs a company might incur to obtain or fulfill a contract with a customer, along with new disclosure requirements. Now that the standard is final, Siegel says companies would be wise to read it carefully and consider how it will affect their own revenue recognition processes. The standard is effective on Dec. 15, 2016, so calendar-year companies will begin applying it in 2017. FASB and IASB have formed a joint transition resource group to address implementation issues that are expected to arise as companies prepare to apply the new standard.

Topics