2017 Revenue Recognition Review: ASU 2014-09 and Subsequent ASU’s
In May of 2014, the Financial Accounting Standards Board (FASB), in conjunction with the International Accounting Standards Board (IASB), issued new financial accounting standards to improve and clarify the principle for recognizing revenue and to enact a common revenue standard for U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The core principle of “Accounting Standards Update (ASU) 2014-09: Enforceable Rights & Obligations Between an Entity and Its Customer” is that an entity recognizes 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. It offers a Five-Step Model, which includes the following:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies a performance obligation
For public entities, implementation of the new standards will take place at the beginning of 2018; private entities are required to implement by 2019. This has allowed for the inclusion of a number of revisions and clarifications to ASU 2014-09, including:
2016-08: Principal vs Agent Considerations (Reporting Revenue Gross vs Net)
This ASU provides additional clarification around who is the “principal” and who is the “agent” when there is another entity involved in providing goods or services to a customer (“PRINCIPAL” recognizes revenue gross; “AGENT” recognizes the revenue at its fee or commission earned).
2016-10: Identifying Performance Obligations and Licensing
This revision differentiates between performance obligations—where an entity evaluates whether promised goods and services are distinct—and licensing—which is used to determine whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (satisfied at a point in time) or a right to access the entity’s intellectual property (satisfied over time).
2016-12: Narrow-Scope Improvements and Practical Expedients
This ASU includes clarifications and practical expedients related to the implementation of ASU 2014-09, such as:
- Provision that collectability should be considered “probable” in order to recognize revenue
- The “transaction price” is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (i.e. sales taxes).
- Clarifies that the measurement date for noncash consideration (which, according to ASU 2014-09 is measured at fair value), is contract inception
- Clarifies that if an entity is retrospectively adopting ASU 2014-09, it does not need to disclose the effect of the accounting change for the period of adoption (to do so would require the entity to calculate revenue recognition under prior GAAP).
- Adjustment to guidelines for contract modifications at transition
- Language Clarification: the definition of “completed contract”
The goal of the new revenues standard (ASU 2014-09) is “comparability” throughout the world and across industries, so the new standard is more grounded in “principles” without industry-specific guidance. The aim is for a single revenue model to apply to all revenue contracts with customers. To discuss this topic in greater detail, please contact your Scott and Company advisor at 803.256.6021.