FASB Revenue Recognition Exposure Draft Becomes ASC 2014-09
fter nearly a decade of work, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09 "Revenue from Contracts with Customers" (“ASC 2014-09” or the “Standard”). As a result of receiving over 1,500 comment letters, this joint project with the International Accounting Standards Board (“IASB”) took nearly four years from its initial exposure draft to its ultimate issuance in May of 2014. The final standard will ultimately reside in a newly formed topic (Topic 606) in the FASB’s Accounting Standards Codification.
The core principle of ASC 2014-09 is to recognize revenue when control of the goods or services transfers to the customer, as opposed to the existing guidance of recognizing revenue when the risks and rewards transfer to the customer. In summary, a revenue-generating event is built upon a contract between a vendor and a customer (for goods and/or services). The contract depicts the exchange of performance obligations (by the seller) for consideration (from the buyer). The amount of revenue to be recognized is based upon the consideration that the vendor expects to receive and it is recognized in the period that the customer obtains control over each performance obligation (e.g., point in time, or over a period of time).
In order to accomplish this core tenant, the FASB established the following five steps:
- Identify the contract with the customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies the performance obligations.
More robust guidance has been included on such topics as:
- Multiple element arrangements
- Determining whether revenue should be recognized at a point in time or over time
- Contract combination, separation and modification
- Variable consideration (potentially significant for entities that currently do not estimate it)
- Time value of money
- Costs of fulfilling or obtaining a contract
Impact on Various Industries
The Standard establishes a single, comprehensive revenue recognition model applicable to almost all industries. It supersedes current revenue recognition guidance including hundreds of pieces of literature addressing various industry specific rules (e.g., real estate, construction and software).
The potential impact of the Standard is expected to vary greatly by industry. However all revenue-generating entities will be subject to significantly increased disclosure requirements. Some key drivers that may have significant impact:
- The increased need for vendors to make estimates and use judgment (e.g., variable consideration; identifying performance obligations, estimating stand-alone selling prices and allocating the transaction price).
- Industries that historically followed industry-specific accounting guidance that has been superseded (e.g., software, telecommunications, real estate, asset management, aerospace, building and construction, and contract manufacturing) will now follow the single model.
The Standard provides for two methods of transition: (i) full retrospective (with certain practical expedients) or (ii) a modified retrospective approach. Under the modified approach, entities will apply the Standard prospectively to any new contracts (after the effective date) and will record a cumulative adjustment to the opening balance of retained earnings for all contracts that were complete at effective date.
Public companies -- Annual periods beginning after December 15, 2016 (including interim periods) and early adoption is not permitted.
Nonpublic companies -- May elect to early adopt in the same period as public companies, however they are granted an additional year (annual periods beginning after December 15, 2017).
The following is a quick illustration of the timetable for adoption. For companies with a December 31 year end, the Standard would be adopted in the following periods:
|Entity||Date of Adoption|
|Large accelerated filers; accelerated filers and non-accelerated filers||January 1, 2017 (with comparative historical periods beginning January 1, 2015)|
|Smaller reporting companies||January 1, 2017 (with comparative historical periods beginning January 1, 2016)|
|Scheduled adoption||January 1, 2018 (with comparative historical periods beginning January 1, 2017)|
|Early adoption||January 1, 2017 (with comparative historical periods beginning January 1, 2016)
What to Do Now?
Companies need to act now and act swiftly in order to be ready by the effective date as the implementation process will include the need to understand the guidance, determine an implementation strategy, and evaluate the impact. In addition, complying with this standard will likely require modifications to company’s IT systems, overhauls in their accounting systems and significant training throughout many levels of an organization.
In an effort to assist in the process, the FASB and the IASB announced that they are in the process of developing a joint transition resource group, and the AICPA has developed multiple industry-based task forces. Additional details about these groups will be issued in the coming weeks.
In the near term, companies and their auditors should be meeting to discuss the Standard, evaluate its potential impact on significant revenue streams and determine what should be communicated to the relevant stakeholders (i.e., audit committees, investors) as companies develop their implementation strategy.
For companies reporting under IFRS, it is worth noting that the IASB issued a converged revenue recognition standard (IFRS 15) on the same day as the U.S. Standard was issued. EisnerAmper will be separately providing our thoughts on IFRS 15 in the coming days. In addition, stay tuned for additional insights from EisnerAmper on:
- Financial services
- Technology and life sciences
- Sports, entertainment and media