The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have recently released an exposure draft that proposes new revenue recognition guidance that could considerably change the way companies recognize revenue. This proposed standard is intended to continue to increase the consistency of revenue recognition for similar contracts, regardless of industry. Under this proposed standard, a single, contract-based asset and liability approach is employed, whereby revenue is recognized when the company satisfies its obligations to its customers, which occurs when control of an asset (whether a good or a service) transfers to the customer.
Each manufacturer will be impacted differently by the proposed standard; however, certain companies that recognize revenue for long-term construction like contracts, warranties, incentives such as commissions and the accounting for contract costs will be particularly affected.
Management will need to consider the impact of the newly proposed standard on all aspects of the business, including contract negotiations, budgeting and bank financing (debt covenants). The new standard is expected to be issued in final format in 2011; however, it will not be effective for companies until 2014.
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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.