“To report useful, consistent, and comparable information to financial statement users about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.”
That sentence is the overall objective of the new revenue recognition standard that was issued by the Financial Accounting Standards Board (FASB) in May 2014. This new standard falls under Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers.
To achieve that objective, the core principle of the standard is that an entity will 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.
Since its release, the FASB has been continually working to clarify and improve guidance around implementation. In addition to delaying the effective date, it has already issued several Accounting Standards Updates (ASUs), with a proposed ASU on the table.
Below is a summary of the impact of these ASUs.
Effective Date
As a result of ASU 2015-14, the standard is essentially effective for public entities beginning in 2018 and for nonpublic entities in 2019. Early adoption is permitted, but no earlier than the original public entity effective date of fiscal years beginning after December 15, 2016.
The following table shows the effective dates for common year-ends:
| Year-End | Public Effective Date | Nonpublic Effective Date |
|---|---|---|
| 12/31 | January 1, 2018; Presented first in Q1 (3/31/2018) Form 10-Q |
January 1, 2019; Presented first in annual financial statements (12/31/2019) |
| 3/31 | April 1, 2018; Presented first in entity’s Q1 (calendar Q2; 6/30/2018) Form 10-Q |
April 1, 2019; Presented first in annual financial statements (fiscal year ended 3/31/2020) |
| 6/30 | July 1, 2018; Presented first in entity’s Q1 (calendar Q3; 9/30/2018) Form 10-Q |
July 1, 2019; Presented first in annual financial statements (fiscal year ended 6/30/2020) |
| 9/30 | October 1, 2018; Presented first in entity’s Q1 (calendar Q4; 12/31/2018) Form 10-Q |
October 1, 2019; Presented first in annual financial statements (fiscal year ended 9/30/2020) |
Recent Changes to the Standard
In addition to the delayed effective date indicated above, the FASB has issued three ASUs to address implementation concerns:
- ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), clarifies the following:
- How an entity should identify the unit of accounting for the principal versus agent evaluation
- How the control principle applies and relates to certain types of arrangements and indicators
- ASU 2016-10, Identifying Performance Obligations and Licensing, requires entities to classify intellectual property in one of two categories (i.e. functional or symbolic) and clarifies the following:
- Entities should consider whether the licensor undertakes activities that significantly affect the intellectual property’s “utility”
- How the sales- and usage-based royalty constraint is applied
- The accounting for license renewals and restrictions
- When a promised good or service is separately identifiable
- Entities can disregard items that are immaterial in the context of a contract
- ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, provides a practical expedient to account for contract modifications executed prior to the adoption of the new standard and clarifies the following:
- The collectibility objective
- The fair value of noncash consideration should be measured at the inception of a contract
- An entity can make an election to exclude certain types of collected taxes from the transaction price
The FASB also issued a proposed ASU in May 2016 that addresses numerous areas, including:
- Preproduction costs
- Impairment testing of contract costs
- Provisions for losses on construction-type and production-type contracts
- Clarification of a scope exception for Topic 944, Financial Services – Insurance
- Disclosures of remaining performance obligations
- Contract modifications
- Fixed-odds wagering contracts in the Casino Industry
- Cost capitalization for advisors to private and public funds
Many of the decisions on the above were affirmed in an August 31, 2016 FASB meeting. In addition, the FASB also decided to propose amendments in the following areas:
- Financial guarantees
- Advertising expense accruals
- Contract liabilities
The effective date of the standard is quickly approaching. All organizations should start preparing to implement the new standard. As noted above, the FASB has made a few recent improvements to the standard that should help organizations implement it in a high quality and cost-effective manner. The FASB’s Transition Resource Group will be meeting again in November, so be on the lookout for more updates.
Craig B. Evans can be reached at Email or 215.441.4600.
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