What a long, strange trip it’s been from the release of the new revenue recognition standard to the adoption year for private companies. The Financial Accounting Standards Board (FASB) released its initial changes to accounting for revenue from contracts five years ago under ASC Topic 606, Revenue from Contracts with Customers. In the intervening years, changes have been made, effective dates delayed, and public companies adopted the standard.
Public business entities will be among the first adopters of the revenue recognition standard and must implement the changes at the beginning of the 2018 calendar year. In anticipation of the first financial statement audits that include the new revenue recognition standard, the PCAOB released Staff Audit Practice Alert No. 15: Matters Related to Auditing Revenue from Contracts with Customers. It highlights six provisions of the new revenue recognition standard that pose the greatest risk for audit deficiencies. Although the PCAOB directs the staff alert at auditors of the public sector, the audit risks will be similar for private business entities as well.
Revenue recognition under ASC Topic 606 includes new and extensive disclosure requirements that will significantly impact revenue-generating companies, whether publicly traded or privately held.
New revenue recognition standards for U.S. and international financial reporting will require careful planning and education to develop an implementation strategy. In addition, the standard affecting U.S. generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) may bring about substantial income tax consequences. Historically, many entities found that the financial reporting standards and tax rules regarding revenue recognition ran parallel and produced identical results; under the new standard this may no longer hold true.
Topic 606 introduces a 5-step process for the recognition of revenue that applies to all entities that have contracts with customers within its scope. Entities that license intellectual property (licenses) through contracts with customers also apply the 5 steps but have some special considerations that are applicable to the unique nature of licenses.
Once entities allocate the transaction price, they can then move to the fifth and final step of the new revenue recognition standard: recognizing revenue. Step 5 requires entities to recognize the consideration given for an asset when or as the performance obligation has been satisfied. This point occurs when the customer receives control of the good or service.
Six elements the Joint Transition Resource Group for Revenue Recognition earmarked for change became part of the final standard recently. Accounting Standards Update (ASU) 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients, updates guidance related to collectibility, presentation of sales and use taxes, noncash consideration, contract modifications and completed contracts at transition.
The bulk of the changes remain the same as outlined in the exposure draft released last fall. The ASU also includes a technical correction.
Step 4 of the new five-step revenue recognition standard requires the allocation of the transaction price to each performance obligation in a contract with a customer. Entities reach this point by first identifying the contract with a customer, identifying the performance obligations in the contract and determining the transaction price.
Comment period extended until end of June
The Financial Accounting Standards Board (FASB) proposed amending ASU 2014-09 Revenue from Contracts with Customers (Topic 606) to clarify two key issues: how to properly identify performance obligations and account for licenses for intellectual property in the new standard.
The new standard requires entities use a five-step revenue recognition approach: