FASB Issues Long-Awaited Revenue Recognition Standard

Overview

On May 28, 2014, the FASB and the IASB (collectively “the boards”) issued their sweeping revenue recognition standard, Revenue from Contracts with Customers[1]. This multiyear joint project with the IASB received more than 1,500 comment letters throughout the process. With a converged standard the FASB hopes to provide greater comparability with global financial statements while improving the financial reporting of revenue within U.S. GAAP.

Primary Provisions

The core principle of the new standard is that “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.” Guidance has been provided for certain transactions not previously covered as well as improved guidance for other transactions such as multiple-element arrangements.

The standard provides a five-step process for recognizing revenue:

  1. Identify the contract with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

The new standard is more principles based with fewer rules. Previous industry and transaction specific guidance has been superseded; as such, greater judgment will be required. Additional guidance has been provided regarding capitalizing certain costs associated with obtaining a contract as well as costs required to satisfy a contract with a customer.

The boards have established a Joint Transition Resource Group for Revenue Recognition (TRG) to bring issues and questions from practice to the boards’ attention for consideration. The TRG will not issue authoritative guidance, but will be used to inform the Boards on implementation issues, which will help the Boards determine what, if any, action will be needed to address those issues. Jeff Bryan, a Partner in our Professional Standards Group, has been appointed to the TRG.

Disclosures

Disclosures are intended to enable users to understand the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. Disclosures are required for revenue that has been recognized as well as revenue to be recognized in the future from existing agreements. Qualitative and quantitative disclosures are required for contracts with customers, significant judgments or changes in judgments, and costs capitalized as a result of obtaining or fulfilling contracts.


[1] FASB issued as ASU 2014-09, Revenue from Contracts with Customers; IASB issued as IFRS 15, Revenue from Contracts with Customers