Jan 08

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New Standard for Revenue Recognition is Coming

The final touches are being put on the new single, principles-based standard that will update and converge revenue recognition under the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board.  The change will impact entities that use US generally accepted accounting principles (“GAAP”) or International Financial Reporting Standards (“IFRS”).

The new principles-based approach indicates

“an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

To achieve that core principle, an entity would apply all of the following steps:
1. Step 1: Identify the contract with a customer.
2. Step 2: Identify the separate performance obligations in the contract.
3. Step 3: Determine the transaction price.
4. Step 4: Allocate the transaction price to the separate performance obligations in the contract.
5. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.”

Such a change will have far reaching effects on processes and infrastructure.  In addition, companies should be thoughtful regarding how this affects areas outside of GAAP/IFRS based financial reports, such as commission structures, loan covenants and earn out agreements negotiated under prior accounting rules.  This link provides a more thorough discussion of the implications of the new revenue recognition standard.

About the author

Renee Howdeshell

Renee Howdeshell is a founding member of Fulcrum Inquiry, an accounting, finance and economic consulting firm that performs damage analyses for commercial litigation, forensic accountings, royalty & distribution audits, financial investigations, and business valuations. Ms. Howdeshell holds a degree in Finance and Marketing from the University of Virginia's McIntire School of Commerce and is a Certified Public Accountant (CPA) and a Certified Fraud Examiner (CFE). She has testified as an expert witness in federal court, CA state court and arbitration regarding the results of her work. She can be reached at (213) 787-4112 and her resume is available at www.fulcrum.com.

Permanent link to this article: http://betweenthenumbers.net/2014/01/new-standard-for-revenue-recognition-is-coming/

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