Evolving revenue recognition issues: manufacturers.

• Author: Bocchino, Greg

In May 2014, the International Accounting Standards Board and FASB each released a new accounting standard that addresses when revenue from contracts with customers for goods or services is recognized for financial statement purposes. The new standard replaces much of the existing U.S. GAAP and IFRS guidance with a five-step model for revenue recognition. Public business entities, certain not-for-profit entities, and certain employee benefit plans will be required to use the new guidance for annual reporting periods beginning after Dec. 15,2017, including interim reporting periods within that reporting period. Earlier application will be permitted only for annual reporting periods beginning after Dec. 15,2016, including interim reporting periods within that reporting period.

All other entities would apply the new guidance to annual reporting periods beginning after Dec. 15,2018, and to interim reporting periods within annual reporting periods beginning after Dec. 15,2019. Application would be permitted earlier only as of an annual reporting period beginning after Dec. 15,2016, including interim reporting periods within that reporting period, or an annual reporting period beginning after Dec. 15,2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which an entity first applies the guidance. Although the effective dates seem a long way off, the new rules may result in retrospective or cumulative catch-up adjustments; time is of the essence for assessing the impact on both financial and tax reporting.

The Five-Step Model

Under the new standard, entities must use a five-step model to determine the amount of revenue to be recognized in a financial reporting period. The steps are:

1. Identify the contract(s) with the customer;

2. Identify the performance obligations in the contract;

3. Determine the transaction price;

4. Allocate the transaction price to the performance obligations in the contract;

5. Recognize revenue when (or as) the entity satisfies a performance obligation.

The five-step model may result in differences from current GAAP, and its application to manufacturers will generally depend on the company's type of manufacturing business as well as contracting practices. After applying the guidance in the new standard, a manufacturer will recognize revenue either over time if certain criteria are met, in a manner that reflects performance; or at a point in time, when (or as)...