New revenue recognition standard has significant implications for tax accounting and return preparation.

• Author: Dell, Michael

FASB and the International Accounting Standards Board (IASB) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (IFRS). FASB Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers, creates a single source of revenue guidance for all companies. This is a significant change from prior guidance, which contains many pieces of industry- or transaction-specific literature.

The new standard is more principles-based than previous revenue guidance and lacks some of the complexity and specificity of the previous guidance. The lack of bright lines will result in the need for increased judgment. The standard will likely affect an entity's financial statements, business processes, and internal control over financial reporting. It is effective under U.S. GAAP for public entities for annual and interim periods beginning after Dec. 15,2016. There is a one-year deferral for nonpublic entities that do not fall under FASB's new definition of a public business entity. Early adoption is not permitted under U.S. GAAP for public entities, but nonpublic entities may adopt the new standard as of the public-entity effective date. The standard is effective under IFRS for all entities beginning on or after Jan. 1, 2017. Early adoption is permitted under IFRS.

New Revenue Accounting Principles

The new standard provides accounting guidance for revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are in the scope of other U.S. GAAP standards, such as leasing contracts). The guidance also provides a model for the measurement and recognition of gains and losses on certain sales of nonfinancial assets, such as property, plant, and equipment and real estate. It also addresses the accounting for some items not typically thought of as revenue, such as certain costs associated with obtaining and fulfilling a contract.

The standard's core principle is that a company will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today's guidance in U.S. GAAP. These judgments include those relating to identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation.

The five-step model: The guidance outlines the principles an entity must apply to measure and recognize revenue and the related cash flows.

The principles in the new standard will be applied using the following five steps:

1. Identify the contract(s) with a 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; and

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

An entity will need to exercise judgment when considering the terms of the contract(s) and all of the facts and circumstances, including implied contract terms. An entity also will have to apply the requirements of the new standard consistently to contracts...