On May 28, 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) bringing to a conclusion its project to clarify principles for recognizing revenue.
ASU 2014-09 also results in a common revenue standard for U.S. GAAP and International Financial Reporting Standards.
This new update will help:
- Achieve comparability of revenue recognition principles across entities
- Eliminate diversity in practice
- Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer
The revenue recognition standard represents a joint project between the FASB and the International Accounting Standards Board (IASB). The project had been ongoing for some time. An initial Exposure Draft of the proposed standard was issued on June 24, 2010, and a revised Exposure Draft was issued on January 4, 2012. In total, the FASB and the IASB received more than 1,500 comment letters in response to the proposals.
The core principle of the ASU is that 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.
To achieve that core principle, an entity should apply the following steps:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies a performance obligation
The ASU also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements.
The FASB and the IASB have also established a joint transition resource group in order to aid transition to the new standard.
For a public entity, ASU 2014-09 is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted.
For all other entities (nonpublic entities), ASU 2014-09 is effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018.
A nonpublic entity may elect to apply this guidance earlier, but only as of the following:
- An annual reporting period beginning after December 15, 2016, including interim periods within that reporting period
- An annual reporting period beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017
- An annual reporting period beginning after December 15, 2017, including interim periods within that reporting period
Entities should apply the amendments in ASU 2014-09 utilizing one of the two retrospective methods outlined in the ASU.
Section A of ASU 2014-09, Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs – Contracts with Customers (Subtopic 340-40) is available by clicking here.
Section B of ASU 2014-09, Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables is available by clicking here.
Section C of ASU 2014-09 which provides Background Information and Basis for Conclusions is available by clicking here.
Readers should not act upon information presented without individual professional consultation.
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