Understanding Revenue Recognition
Accounting Standards Update No. 2014-09, issued by the Financial Accounting Standards Board (FASB), establishes principles to report useful information to users of financial statements about the nature, timing and uncertainty of revenue from contracts with customers.
In fact, the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) were joined with the FASB for a converged standard on the recognition of revenue from contracts with customers.
Revenue from Contracts with Customers
Revenue from Contracts with Customers (Topic 606) removes inconsistencies and weaknesses in existing revenue requirements. In addition, it
- provides a more robust framework for addressing revenue issues;
- improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets;
- provides more useful information to users of financial statements through improved disclosure requirements; and
- simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer.
If your business enters into contracts with customers to transfer goods or services or to transfer nonfinancial assets, this guidance will be useful to you. Insurance contracts and lease contracts fall within the scope of other FASB standards.
If you’re part of a public organization, you’ve been aware of this guidance and using it for annual reporting periods since December 15, 2017, and for interim reporting periods, too. Nonpublic companies, including not-for-profits, saw the guidance kick in for annual reporting periods after December 15, 2018, including interim reporting periods.
Financial Reporting and Comparability
The upshot is improved financial reporting of revenue and improved comparability of the top line in financial statements globally. FASB handles U.S. Generally Accepted Accounting Principles (GAAP). Instead of having to deal with different accounting for transactions that looked economically similar, you’ll deal with just one standard. Also, you’ll be able to offer sufficient detail, without having to be overly prescriptive and avoid conflicts between IFRS and GAAP requirements.
You’ll also be pleased by the quality and consistency of how revenue is reported and the improved comparability in financial statements domestically and globally. FASB chairman Russell Golden is satisfied that this convergence improves financial reporting by eliminating a major source of inconsistency in GAAP. He called it “a major first step, but not the end of the process.”
A smooth transition to the new requirement is being worked on by FASB and IASB. In the meantime, contact us for help with these clarifications.