New Revenue Recognition Guidance

• Date: 01 September 2014
• Author: Oscar J. Holzmann,Paul Munter
• DOI: http://doi.org/10.1002/jcaf.21992
• Published date: 01 September 2014

73

© 2014 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.21992

D

e

p

a

r

t

m

e

n

t

s

FASB

Oscar J. Holzmann and Paul Munter

New Revenue Recognition Guidance

The Financial Accounting

Standards Board (FASB) and

the International Accounting

Standards Board (IASB) have

been working for over a decade

to develop a joint standard on

revenue recognition. On Novem-

ber 14, 2011, the FASB and

IASB issued their most recent

Exposure Draft (ED) on the

subject, Revenue From Con-

tracts With Customers, including

proposed amendments to the

FASB Accounting Standards

Codification, which was open

for comments until March 13,

2012. After significant outreach

efforts and further deliberations

conducted during the ensuing

postcomment period, a meeting

of the Boards on November 6,

2013, marked the completion

of their discussions on revenue.

Since then, the Board’s staff

have continued drafting the final

update, which was finally issued

on May 28, 2014.

1 For public

business entities applying U.S.

generally accepted accounting

principles (GAAP), the standard

will be effective for fiscal years

beginning after December 15,

2016, and interim periods within

that year. For other entities

applying U.S. GAAP, it will be

effective for fiscal years beginning

after December 15, 2017, and for

interim periods thereafter. Enti-

ties will have the option to apply

the final standard retrospectively

with or without the use of any

of three practical expedients,

or the standard can be adopted

using the cumulative effect transi-

tion method. An entity will not

restate prior periods if it uses the

cumulative effect method.

THE NEW REVENUE

RECOGNITION MODEL

The new standard does

not change the definition of

revenues, which is based on the

changes in assets and liabilities

from transactions with cus-

tomers in the ordinary course

of business. It does state that

revenues are “inflows or other

enhancements of assets of

the entity or settlements of its

liabilities (or a combination of

both) from delivering or produc-

ing goods, rendering services,

or other activities that consti-

tute the entity’s ongoing major

or central operations.” The

new standard aims to provide

revenue recognition guidance,

with the stated objectives of the

Boards’ project being to

2

a. “remove inconsistencies

and weaknesses in existing

revenue recognition stan-

dards and practices;

b. provide a more robust

framework for addressing

revenue recognition issues;

c. improve comparability of

revenue recognition prac-

tices across entities, indus-

tries, jurisdictions, and

capital markets;

d. provide more useful infor-

mation to users of financial

statements through

improved disclosure

requirements; and

e. simplify the preparation

of financial statements by

reducing the number of

requirements to which enti-

ties must refer.”

The new contract-based

revenue recognition model is

built on the concept of rights

and obligations arising from a

contract

3 between a company

and its customer. The core prin-

ciple to the model is that revenue

should be recognized when (or

as) the entity transfers control

of the good or service to the

customer at an amount to which

the entity expects to be entitled.

Transfer can either be deemed

to occur at a point in time or

over time depending whether

certain criteria are met. Because