Changes in Accounting for Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued a standard addressing revenue recognition which provided guidance on revenue from contracts to provide goods or services to customers.  The new standard provides potential changes in timing and measurement of revenue to be realized.  After a deferral of the effective date, the standard should now be implemented by non-public companies for periods beginning after December 15, 2018.  The new standard will impact various for- profit industries, some more than others, as well as non-profit entities.

The basic premise requires revenue be recognized in conjunction with the transfer of goods or services in the amount that accurately reflects the consideration due the seller for the exchange of goods or services.

Five Steps for New Revenue Recognition

As the seller, you will follow a five step process to determine the amount of revenue to recognize:

1. Identify and determine the contract with your customer. Do you have an approved agreement with payment terms and collection is probable?
2. Identity the performance obligations in your contract. Are there distinct individual pieces or should the pieces be bundled since individual pieces are dependent on one another?
3. Determine the transaction price. How much and when will you be paid? Any discounts or rebates or will consideration be paid in something other than cash?
4. Allocate the transaction price to the contract’s performance obligations. If your contract is comprised of multiple separate performance obligations, recognition may be allocated and staggered as stages are completed.  Think of a long term construction contract.
5. Recognize revenue when your customer uses the goods or services and control has been transferred.

Challenges in implementation include accounting for variable consideration, combining or bundling performance obligations, revisiting and reviewing existing contracts and financial statement disclosures.

Companies should review their procedures sooner rather than later if they have not already done so since the transition is right around the corner. Contact an Alloy Silverstein team member today for assistance or more information.