On November 14, 2011, the FASB and IASB (the “boards”) jointly issued their revised exposure draft (ED) Revenue From Contracts With Customers. The revised ED, released by the FASB as a proposed Accounting Standards Update (ASU), is the result of months of redeliberations of their June 2010 ED. The proposed ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and would supersede most current revenue recognition guidance.
The proposed ASU’s core principle is that “an entity shall 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.”
The proposed ASU would apply to all contracts with customers except those that are within the scope of certain other Codification topics. It also clarifies that contracts with counterparties that are collaborators or partners, rather than customers (common in certain industries, such as pharmaceuticals and biotechnology, oil and gas, and health care), do not represent contracts with customers and are outside the scope of the proposed ASU.
In applying the provisions of the proposed ASU to contracts within its scope, an entity would:
- “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 in the contract.”
- “Recognize revenue when (or as) the entity satisfies a performance obligation.”
Compared with current U.S. GAAP, the proposed ASU would also require significantly expanded disclosures about revenue recognition.
The boards plan to consider the comment-letter feedback and perform extensive outreach activities before finalizing the revenue recognition project. A final standard is not expected until later in 2012, and the effective date will be no earlier than January 1, 2015 (with a minimum of a one-year deferral for nonpublic entities).
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