New Revenue Recognition Standard and its Effect on Real Estate Sales
In May 2014 a new revenue recognition standard was issued by the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”). This change is expected to impact a number of different industries, including real estate. The proposed Accounting Standards Update (“ASU”) establishes the principal stating that an entity will recognize revenue upon the transfer of goods or services to customers in the amount that reflects what the entity expects to be authorized in exchange for those goods and services.
For public entities, the ASU would be effective for annual reporting periods beginning after December 15, 2016. However, in April 2015, the FASB issued a proposal to push back the effective date of the Standard by one year.
The following five steps outline the new process for the principles-based revenue model:
- Identify the contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
As expected, the new standard may create some challenges for entities accounting for real estate sales. The challenges stem from the increased effort now required by management, as outlined in the steps above. Despite the number of years before this new standard is put in place, organizations should begin to think about its impact and plan accordingly. To read about this Accounting Standards Update in more detail, please click here.