In May 2014, the Financial Accounting Standards Board (FASB) finalized Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. As you likely know, this is a broad, principles-based standard for recognizing revenue from contracts that will supersede numerous revenue recognition requirements for particular industries or transactions. In addition, this standard generally converges revenue recognition standards for accounting principles generally accepted in the United States (GAAP) with International Financial Reporting Standards (IFRS).
The standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods for:
- Public business entities;
- Not-for-profit entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market; and
- Employee benefit plans that file or furnish financial statements with or to the U.S. Securities and Exchange Commission.
For all other entities, the standard is effective for annual reporting periods beginning after December 15, 2018, and subsequent interim periods. Certain early application provisions are available for all entities.
Since the revenue recognition standard was finalized, the FASB has issued some additional standards (ASU Nos. 2016-08, 2016-10, and 2016-12) that clarify certain concepts. Following is a brief summary of each of these clarifying standards:
- Principal Versus Agent Considerations – Additional guidance should help an entity determine whether the nature of each promise is to provide the specified good or service itself (the entity is a principal) or to arrange for another party to provide that good or service (the entity is an agent). This affects whether the entity will recognize revenue for the gross consideration it expects to receive from the customer (principal) or only for the fee or commission it expects to receive from the third party (agent).
- Identifying Performance Obligations and Licensing – Targeted clarifications affect the following:
- Immaterial promised goods or services
- Shipping and handling activities
- Determination of whether promises to transfer goods or services to a customer are separately identifiable
- Licensing – Clarification was provided to help entities that sell licenses or royalties properly recognize the related revenue in the correct period.
- Collectibility – The collectibility criterion was updated to clarify that the objective of the criterion is to assess whether the contract represents a substantive contract on the basis of the customer’s intent and ability to pay. It was also updated to add flexibility to recognize revenue in additional circumstances when collectibility is in doubt but the entity receives a cash payment from the customer.
- Sales Tax – An amendment was added that allows entities to make an accounting policy election to exclude from the transaction price amounts collected for sales taxes and other similar taxes.
- Noncash Consideration – The update specifies that the measurement date for noncash consideration is the contract inception date and that the variable consideration guidance does not apply to variability resulting from the form of consideration.
- Transition – A practical expedient was provided for contract modifications that occur before the earliest period presented in the financial statements when the revenue recognition standard is adopted. This amendment also clarifies what is considered a completed contract at the transition date and what disclosures are required for the accounting change.
The FASB also has issued an exposure draft that would provide clarification in the following areas:
- Preproduction costs related to long-term supply arrangements
- Impairment testing
- Provision for losses on construction-type and production-type contracts
- Contracts covered by ASC Topic 944 (insurance)
- Disclosure of remaining performance obligations
- Contract modification implementation guidance
- Fixed-odds wagering contracts in the casino industry
- Cost capitalization for advisors to private and public funds
Since the revenue recognition standard was finalized, the FASB formed the Transition Resource Group (TRG) to hear feedback on the standard and discuss tentative issues that have been identified. The group provides the FASB with its analysis and recommendations for amendments that would clarify the issues noted.
To date, the TRG has discussed at least 54 implementation issues. This has not only helped the FASB develop clarifying standards, but also helped educate various stakeholders about the new standard, which should increase the level of consistency among entities adopting the standard. Anyone may submit implementation questions to the TRG or the FASB through the FASB’s Technical Inquiry Service found on the FASB’s website. In addition, summaries of the different implementation issues discussed can be found on the FASB’s website and may provide guidance if your entity is dealing with a similar question or issue.
To provide additional guidance, the American Institute of Certified Public Accountants (AICPA) has formed 16 different industry task forces that are helping the AICPA develop an accounting guide on revenue recognition. This guide will provide illustrative examples of how to apply revenue recognition principles to transactions related to these industries. Current draft issues submitted to the AICPA’s Financial Reporting Executive Committee and other resources are available on the AICPA’s website.
What Should I Do Now?
As you can see, the FASB has provided some clarification of the revenue recognition standard, but it does not appear any substantive changes to the guidance will be made. The TRG continues to address implementation issues that arise, and the AICPA is working on illustrative examples targeting specific industries. However, there are steps entities can take today to make the transition to the new standard as smooth as possible:
- Learn about the revenue recognition standard and its key principles, including the recent clarifying amendments discussed above.
- Identify customer contracts your entity has entered into or potentially will enter into, and consider how the standard might affect the related accounting.
- Read and consider implementation guidance that is available today and that becomes available in the future. Regularly check for updated TRG information on the FASB’s website and for the status of the revenue recognition guide and other resources on the AICPA’s website.
- Understand the transition requirements and their impact on your entity’s financial reporting.
- Talk to your Wipfli relationship executive about questions and key implementation issues you identify.
- Educate others within your organization about changes they may have to make to implement the new standard.
The revenue recognition changes are not going away and will be significant for many entities. Careful planning will give your entity the best chance at successfully adopting these changes with the least amount of pain and suffering. Please contact your Wipfli relationship executive if we can be of any help as you navigate this challenging process!