Improving Revenue Recognition Standards

New Revenue Recognition Standards

Revenue forms one of the measures widely employed by businesses and investors to gauge the performance of an organization as well as its several prospects. However, guidance on revenue recognition differs in the context of GAAP (Generally accepted principles) and IFRS (International Financial Reporting standards), and it is widely believed that there is a need for improvement to make both of these standards better.

The FASB developed new approaches to revenue recognition on the 28 of May, 2014 that is currently under use in contracts between businesses and consumers.

This new approach marks a huge milestone In the FASB’s attempts to develop the concept of revenue reporting and recognition (Fasb.org, 2017). The new standard will be enforced in contracts between organizations and consumers with the exception of contracts that make use of other additional contracts, for instance, insurance, leases or financial instruments. Contract elements of contracts that fall within the boundary of another standard, for example, leases, are separated and considered under that scope.

Based on the new standards, units of account are based on performance obligations, be it regarding goods or as a service. Under normal circumstances, it possible to find contracts that have more than one performance requirement (Fasb.org, 2017).

Although the term performance requirement has a slightly different definition, using today’s analogy, it is closer in meaning to the phrase performance deliverable, which is common with the multiple elements of guidance revenue arrangements Performance requirements are examined separately where they appear to be distinct.

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In principle, a service or commodity is considered separate if found that the consumer can derive benefits from the service or good separately, or in conjunction with various additional resources available to consumers. This applies only if the service or commodity is distinct within the confines of the contract to which it falls. Otherwise, performance requirements will be bundled up with other services or products until such a time that the business can identify services or goods that are distinct in nature. Under the new standards, the price of commodity or services is assigned to separate performance requirement. It is meant to reflect the extent of consideration an entity will be eligible for to have the opportunity to transfer services and goods. This entitlement may also consist of estimates of all variable factors to the extent that is considered not likely for crop up of reversals shortly (Fasb.org, 2017).

Under this new arrangement, price or cost of the transaction is expected to reflect the time value of currency where a contract involves significant financial obligations. However, the cost of the transaction will exclude the amount collected for the third party, for instance, taxes on sales. The new standards will come into play where it is found that an organization has met each performance requirement through the transfer of control of goods that were promised to a consumer. Services and commodities are transferable at instances in time, and this is dependent on nature of the agreement between the entity and the consumer. The new standards provide specific criteria that are used to measure and establish whether or not a performance requirement has been met. Incremental cost incurred in the process of securing contracts is capitalized where cost recoverable.

The cost incurred in the course of fulfilling the requirements of contracts is capitalized if it is not covered by another guidance that is related directly to a particular contract. This cost is used to fulfill future obligations, and it is recoverable. As is amended, the new standard shows the effectiveness and is expected to take effect in the public domain after 15 of December, 2017. However, companies that are private have more time to implement this new standard. The new rule takes into consideration early implementation, but this will not be sooner than the expected actual date for those organizations that are public. The new standards have not been without challenges. In the year 2016, the IASB and the FASB undertook many amendments as well as clarifications due to many issues that were raised by the stakeholders. These issues were identified and discussed under the Transition Resource group’s guidance (American Institute of Certified Public Accountants, 2014).

Most of the amendments were undertaken in the area of agent versus principle assessment to identify performance requirement, accounting of intellectual properties and licenses and various other matters, for instance, the proper definition and categorization of complete contracts during the transition level or the inclusion of emerging expedients. This improvement brought about by the ironing out of issues that were previously identified has allowed for the application of the new standard in retrospect, and this also includes the use of particular expedients practically (American Institute of Certified Public Accountants, 2014). As an alternative, an organization may opt to recognize cumulative that arise from the application of the new standard to an already existing contract. During FAB’S advisory meeting, it was established that SEC does not require intent to show objections where companies choose to apply the new standard in retrospect and therefore recast their earliest years. The new standard has solved many of the issues that were associated with GAAP. For instance, GAAP had established a lot of requirements for the purpose of recognizing accrued revenue. The new standards have set up simpler and absolute rules that are applicable regardless of an entity’s geographical location (American Institute of Certified Public Accountants, 2014).

Apart from accounting disclosures, segment reports and policies, many companies as well as reporting entities provide insufficient information relating to revenue and contracts. The New Standard has cohesive requirements for disclosure that provide financial statement users with sufficient information regarding an entity’s engagement with consumers (American Institute of Certified Public Accountants, 2014). Under GAAP, services and goods that are provided in contracts with consumers are considered indistinct and non-revenue generating when in an actual sense such promises are representative of the unique requirement that the entity needs to meet when transacting with a customer. The new standards are effective on this matter and have provided mechanisms for the recognition of those elements pledged to consumers and now it is possible to determine whether those goods are representative of a performance requirement and revenue is then recognized once those requirements are met (Beil, 2013).

Unlike the New standards that designate cost to every performance requirement, GAAP limited the extent of consideration that was assigned to deliverables to a sum not the contingent delivery of services or goods in future. Unfortunately, GAAP caused a lot of disparities across industries. Variable accounting differed significantly across all sectors. The FAB’s new standards have evened the playing field since there is only one model that is used in consideration of variables and it includes discounts, rebates, bonuses as well as right to return goods (Beil, 2013).

References

1. American Institute of Certified Public Accountants. (2014). Understanding revenue recognition:Changes to U.S. GAAP. New York: American Institute of Certified Public Accountants