Revenue Recognition, Second in a Series: Back to the Future


By Benjamin O'Leary

As a part of Accounting Standards Update 2014-09 (ASU 2014-09): Revenue from Contracts with Customers, Financial Accounting Standards Board (FASB) entities will have to perform analysis on prior periods presented to determine the impact of ASU 2014-09 on their financial statements. Once analyses of completed and ongoing contracts have been finished, the next step is determining which transition method an entity should choose.   The FASB has indicated two ways in which an entity can transition and implement the new standard. An entity can choose whether to do so retrospectively to each prior period presented or retrospectively with a cumulative effect.

Retrospectively to Each Prior Period Presented: This method is more in line with a standard restatement; however, there is some alleviation from a full restatement of the financial statements as it would be shown on the individual line item impacted.  If chosen, this method does not necessitate an entity to restate contracts that begin and end within the same annual reporting period. For any contracts that were determined to have variable consideration associated with the contract, an entity may utilize the price at contract completion date, rather than estimating the impact of these amounts in comparative reporting periods. Additionally, if a contract is found to have separate performance obligation, (i.e., distinct good or service in the contract), there will be no disclosure necessary for any transaction price allocated to that specific performance obligation.

Retrospectively with Cumulative Effect: This method would require an entity to estimate and disclose the impact each individual financial statement line item that is impacted by the change in revenue recognition policy. Additionally, an explanation of the significant changes as a result of the change in revenue recognition policy would be required. This method does not require entities to restate periods presented; however, an entity would need to present the cumulative effect of on beginning-of-the-year retained earnings.

Both transition methods have their own pros and cons, but entities would need to evaluate what makes most sense for them after analyzing completed and ongoing contracts.

It is important to note that the effective date for public business entities has been deferred a year from the original date of periods beginning on or after December 15, 2016 and now applies to annual reporting periods beginning on or after December 15, 2017. The new standard would be applicable for periods beginning on or after December 15, 2018 for nonpublic entities.

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