In June 2010, the Financial Accounting Standards Board (FASB) issued an exposure draft on revenue recognition - “Revenue From Contracts With Customers.” Following is a brief summary of the exposure draft, which highlights some of the key proposed concepts.
Revenue is a critical component of the financial statements, and is crucial to decisions and conclusions made by financial statement users. Revenue recognition has been a hot topic for standards setters recently. Accordingly, the FASB and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and develop a common revenue standard for U.S. GAAP and IFRS that would remove inconsistencies and weaknesses in existing revenue recognition standards and improve comparability.
The proposed guidance would affect any entity that enters into contracts to provide goods or services that are an output of the entity’s ordinary activities, unless those contracts are within the scope of other requirements of U.S. GAAP or IFRS. In U.S. GAAP, the proposed guidance would supersede most of the guidance on revenue recognition.
The proposed guidance specifies the principles that an entity would apply to report useful information about the amount, timing, and uncertainty of revenue and cash flows arising from its contracts to provide goods or services to customers. The core principle would require an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it receives, or expects to receive, in exchange for those goods or services.
To apply the proposed revenue recognition principle, an entity would need to perform the following five steps:
1) Identify the contract(s) with a customer;
2) Identify the separate performance obligations in the contract;
3) Determine the transaction price;
4) Allocate the transaction price to the separate performance obligations; and
5) Recognize revenue when the entity satisfies each performance obligation.
The proposed guidance could have a significant impact on organizations that currently recognize revenue using the percentage of completion method. This exposure draft also addresses accounting for certain costs associated with obtaining a contract as well as provides disclosure guidance. The entire exposure draft can be found on the FASB website here.
For questions on how this draft affects your company, contact Trevor Warren, Assurance Senior Manager at firstname.lastname@example.org.
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