Revenue Recognition: Where it Will Take Us
By Robert Bloom and Jacob Kamm
Financial Executive • SUMMER 2014
Since 2008, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have collaborated on a converged revenue recognition standard. Current U.S. Generally Accepted Accounting Principles (GAAP) standards related to revenue recognition are essentially rules-based, containing over 200 specific requirements related to revenue recognition. In FASB's news release of May 28th, Chairman Russell Golden stated "the [new] revenue recognition standard represents a milestone in our efforts to improve and converge ...view middle of the document...
In fact, those terms will no longer be used. With the jointly issued ASU 2014-09 and IFRS 15, the FASB and the IASB are closer to overall harmonization of accounting standards. Their convergence efforts can now focus on the few remaining significant conflicting standards, the most important of which relates to lease accounting.
Summary of ASU 2014-09 Revenue from Contracts with Customers and IFRS 15 Because current GAAP contains more than
200 specialized or industry-specific revenue recognition-related standards in comparison to the IASB's limited requirements in IAS 11 and IAS 18, the FASB and IASB formally recognized the need in 2008 for a converged revenue recognition standard. On November 14, 2011, the IASB and FASB jointly issued for public comment a revised draft proposal for revenue recogmition meant to improve and unify existing IASB and FASB standards related to revenue recognition from customer contracts. The 2011 exposure draft amended an earlier jointly published exposure draft issued on June 24, 2010, after the public comment phase of that draft indicated a need for further revision. On May 28, 2014, a final converged standard entitled Revenue from Contracts with Customers was issued jointly by the boards. The new standard is designed to improve globally the financial reporting of revenue, which previously often resulted in different
fmancial accounting for economically similar revenue transactions under IFRS and GAAP. New to this standard are: • Provisions emphasizing a contractual approach to recognition. • Provisions pertaining to the application of present value • More detailed disclosure requirements • The inclusion — if probable and not subject to a significant subsequent reversal — of any variable consideration such as a discount, rebate, bonus or right-to-retum. The definition of revenue extends beyond the FASB's Conceptual Framework, making the standard's scope wide-ranging. Recognized revenue, for example, effectively includes the reporting of gains on the sale of equipment. Fundamental to the new standard is the idea that revenue is recognized upon both the transfer of goods and services, and the fulfillment of specific aspects of performance set forth in the contract. Existing GAAP, which emphasizes industry-specific revenue guidance is, eliminated. To the extent revenue originates from longterm contracts, changes in revenue recognition under the new standard will likely occur. Current percentage-of-completion accounting recognizes revenue based on the cumulative costs incurred, while completed contract accounting reflects an uncertain estimation of the degree of contract completion. Because the new standard requires the fulfillment of performance obligations in recognizing revenue, both the percentage-of-completion and completed contract methods commonly used to record long-term construction contracts, as well as the installment and cost recovery methods, will also be superseded. Instead, the boards jointly...