What does the new revenue recognition standard mean for tax?

• Author: Abraham, Mathew

By now, most companies are aware that FASB issued an Accounting Standards Update (ASU) for revenue recognition related to contracts with customers in May 2014 (ASU 2014-09, Revenue From Contracts With Customers (Topic 606)). Some companies may have already started planning the implementation for financial statement purposes. However, the effect of this change in financial accounting hits more than just the financial statements--significant changes could also be in store for tax purposes.

When FASB voted in July 2015 to delay the implementation of the ASU by one year, all companies likely breathed a sigh of relief. Originally, implementation was scheduled for January 2017. Recently, the effective date was changed to 2018 (years beginning after Dec. 15,2017) for public entities, certain nonprofit entities, and certain employee benefit plans, and 2019 (years beginning after Dec. 15, 2018) for nonpublic entities, with an option to adopt early.

Even though implementation was pushed back, companies should get a jump on analyzing its effects and evaluating tax methods. Companies waiting until the last minute to understand the tax implications of the change may be at a disadvantage due to a change in information flow or timing for making crucial accounting method changes.

Background

When FASB issued ASU No. 2014-09, the International Accounting Standards Board (IASB) simultaneously released IFRS 15, Revenue From Contracts With Customers. By doing so, FASB and the IASB have essentially achieved convergence of these standards, with only minor differences. The goal was to remove inconsistencies, not only between U.S. GAAP and IFRS, but throughout different industries, and to provide a more robust framework for analyzing revenue. Replacing industry-specific guidance, the ASU focuses on a new five-step analysis to be applied to all contracts with customers to transfer goods or services (other than leases, insurance, financial instruments, guarantees, and nonmonetary exchanges between entities in the same line of business). These steps include:

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.

   The model indicates that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue is recognized either over time, in a manner that demonstrates the entity's performance, or at a point when control of the goods or...