The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have jointly developed a new revenue recognition project. The project’s objective is to clarify the principles for recognizing revenue and to create a joint revenue recognition standard for U.S. GAAP and IFRS that companies can apply consistently across various industries and transactions.
The proposed revenue recognition standard was published in July 2010 and would affect all entities – public, private and not-for-profit – that have contracts with customers (except for certain items such as certain leases, insurance contracts, derivatives and financial instruments). Although the proposal does not include industry-specific guidance, those most affected could be real estate, construction, and technology companies and any company with multiple element arrangement contracts.
This proposed standard was expected to be issued on June 30, 2011; however, as of April 2011 no exact issuance date has been declared.
This standard proposes a single, comprehensive, revenue recognition model which can be applied to complex transactions regardless of the industry.
Key changes from existing revenue recognition policies are:
- Establish new criteria for when to recognize revenue – when is there transfer of control?
- Percentage of completion method would be removed from U.S. GAAP
- Require identification and segmentation of contracts into performance obligations
- Require a determination of transaction price (factoring credit risk, time value, and variable consideration)
- Change accounting for contract costs
- Revise presentation in the statement of financial position, and
- Establish extensive disclosure requirements
The proposed standard creates the following five-step process for the recognition of revenue:
- Identify the contract with a customer
- Identify the separate performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the separate performance obligations
- Recognize revenue when each separate performance obligation is satisfied
This new proposed standard could potentially affect every company’s daily accounting practices and possibly how companies engage customers into contracts. What you need to do is apply this proposed standard principle to your contracts and determine how it will ultimately affect to your company.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.