Revenue recognition: broad principles, specific rules ... or both?

• Author: Peterson, Paul
• Position: Reporting updates

In May 2014 the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which replaced specific industry rules with broad, core principles.

The result of a joint project between the FASB and the International Accounting Standards Board, the new standard lays out a five-step process applicable to any entity that enters into contracts with customers to transfer goods or services or other nonfinancial assets (excluding leases and insurance contracts).

The steps should be familiar by now:

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.

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

   The original standard also included guidance on the accounting for certain costs to obtain or fulfill a contract with a customer. An entity should recognize as an asset the incremental costs of obtaining a contract that the entity expects to recover, although those costs may be expensed when incurred if the amortization period for the deferred costs would be one year or less.

   Also, an entity should recognize an asset from the costs to fulfill a contract if those costs meet all of the following:

1. Relate directly to a contract (or a specific anticipated contract);

2. Generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and

3. Are expected to be recovered.

   Finally, the standard requires certain qualitative and quantitative disclosures about an entity's contracts; significant judgments and changes in judgments; and assets recognized from the costs to obtain or fulfill a contract.

   Implementation Challenges

   Although simple in concept, the implementation immediately proved to be complicated and, in August, the FASB issued ASU 2015-14, Deferral of the Effective Date. This granted a one-year deferral of the original effective date. Public companies are now required to apply the guidance for annual periods beginning on or after Dec. 15, 2017, including interim periods within that annual period. All other organizations are required to adopt the new standard for annual periods beginning on or after Dec. 15, 2018.

   The FASB and the IASB established the Joint Transition Resource Group for Revenue Recognition after the adoption of the new revenue recognition standard...