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.

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