Converged Standard on Revenue Recognition Released by FASB and IASB

After many years of collaboration, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have released the final converged standard for revenue recognition, creating a common approach for both U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS).

The FASB standard falls under Topic 606, Revenue from Contracts with Customers, and the IASB standard is under IFRS 15, Revenue from Contracts with Customers.

The standard was issued to clarify the principles of revenue recognition. By clarifying these principles, the standard improves the comparability of revenue recognition between different companies, provides better information on financial statements by improving the disclosure requirements, and simplifies the preparation of financial statements. According to FASB, “the introduction of a comprehensive and converged standard on revenue recognition will enable users to better understand and consistently analyze an entity’s revenue across industries, transactions and geographies.”

The converged standard eliminated approximately 200 industry-specific requirements that were under U.S. GAAP and added more guidance and requirements to the current IFRS guidelines. The FASB update will go into effect in 2017 for publicly held companies and 2018 for privately held companies. With the new standard, companies that enter into a contract with their customers will have to follow a five-step process to recognize revenue, which includes:

1. Identifying the contract with a customer
2. Identifying performance requirements within the contract
3. Determining the transaction price
4. Allocating the transaction price to the obligations within the contract
5. Recognizing revenue when (or as) the company satisfies an obligation

Additionally, the new standard requires improved disclosures and guidance when handling service revenue and contract modifications.

In order to help companies transition over to the new standard, the boards have created a joint transition resource group to aid in the implementation. This group will be supported by both FASB and the IASB, with more details to follow in the near future.

Although the new standard doesn’t go into effect for some time, it is a good idea to start planning now. Preparing for the changes well in advance will give companies the opportunity to evaluate where they will be most affected and allow ample time to create a strategy that is best for their company.

Please feel free to contact me at (805) 963-7811 or tsolomon@bpw.com if you have any questions about the new revenue recognition standard, or if you would like help creating a strategy that is best for your company.