New Revenue Recognition Guidelines: There's Work to Be Done

Published date01 November 2016
DOIhttp://doi.org/10.1002/jcaf.22219
AuthorNigel Youell
Date01 November 2016
32
© 2016 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22219
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New Revenue Recognition
Guidelines: There’s Work to Be Done
Nigel Youell
Yes, it’s true,
there is work to
be done. It may
not be “preparing for
an apocalypse” type
of work—but work
nonetheless. In May
2014, the Financial
Accounting Stan-
dards Board (FASB)
and the Interna-
tional Accounting
Standards Board
(IASB) issued a joint revenue
recognition standard related to
customer contracts. The new
guidelines impact most organi-
zations that deliver goods and/
or services on a contract basis,
especially when delivered over
extended periods of time.
While the joint guidelines
aim to establish a global set of
standards for all companies to
recognize and report revenue,
it’s not really about accounting
as much as it’s about capital
markets. By uniformly applying
these guidelines, external stake-
holders (such as shareholders
or financial analysts) can more
easily compare revenue perfor-
mance between organizations.
It’s also interesting to note that
the Securities and Exchange
Commission (SEC) is also plac-
ing emphasis on monitoring
how revenue is reported. In a
September 2013 speech, SEC
Enforcement Director Andrew
Ceresney stated that “Revenue
recognition issues will remain
a staple of our financial fraud
caseload.”1
The new guidelines for rev-
enue recognition ask companies
to align revenue to the delivery
of “performance obligations.”
They must account for these
obligations—items that are
owed to the customer under
the terms of the contract—as
accrued contract liabilities, and
extinguish them by recognizing
revenue on the successful trans-
fer of those items to customers.
No longer will companies apply
the variety of current
practices for recog-
nizing revenue (e.g.,
deferring revenue
on early invoicing).
Application of the
guidelines will require
some companies
to recognize that a
contract exists where
they previously may
not have thought
they had one.
The new revenue recog-
nition guidelines redefine
“revenue” for every U.S.
generally accepted accounting
principles (GAAP) and Inter-
national Financial Reporting
Standards (IFRS) company.
Butthe impact is more severe
for companies that offer dis-
counted goods and services
alongside fully priced goods
and services, and for those
that deliver to customers over
extended timeperiods, or both
simultaneously.
While there are excep-
tions (e.g., the guidelines do
not apply to organizations
covered by other standards
such as insurance or leasing
contracts), all companies need
to review their revenue for
New guidelines for revenue recognition (issued
jointly by the FASB and IASB) are to be applied by
public organizations to annual reporting periods
beginning after December 15, 2017. Nonpublic
organizations have another year after that to begin
to apply the new rules. This article examines the
new rules and their impacts, and lays out a four-
stage approach for adopting the new guidelines.
© 2016 Wiley Periodicals, Inc.
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