Accounting Standards Update 2014-09
"Revenue from Contracts with Customers”
Over the past few years, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working closely together to develop a new set of revenue recognition standards in an effort to merge the standards of FASB and IASB, lessen the amount of industry-specific differences in the standards, and make the standards more principles-based. Because revenue is very important to both internal and external users of financial statements when it comes to assessing the financial performance of an organization, it was vital for the boards to collaborate on creating a universal standard for recognizing revenue making comparability between companies that much easier. On May 28, 2014, a final version of these new standards were officially issued as a joint standard, for both FASB and IASB, on the recognition of revenue from contracts with customers, which is referred to as “ASC 2014-09” (Bramwell, 2014).
Before ASC 2014-09, revenue recognition requirements for U.S. generally accepted accounting principles (GAAP) differed from the conditions set in the International Financial Reporting Standards (IFRS) in many ways. GAAP consisted of revenue recognition concepts that were too broad and rules that were sometimes industry-specific, which often resulted in organizations using different methods of accounting for transactions that were economically similar. While the requirements of GAAP were perceived as inconsistent, IFRS revenue recognition standards, more specifically IAS 18, Revenue, and IAS 11, Construction Contracts, lacked the appropriate and necessary detail (Bramwell, 2014). This imperfection made it nearly impossible to apply IFRS revenue recognition standards to complex matters. FASB and IASB began collaborating in an effort to make the principles of recognizing revenue more concise and to develop a common revenue recognition standard for IFRS and GAAP that would ultimately: “1. Remove inconsistencies and weaknesses in revenue requirements. 2. Provide a more robust framework for addressing revenue issues. 3. Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. 4. Provide more useful information to users of financial statements through improved disclosure requirements.
5. Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer (FASB, 2014).” According to FASB, the main principle of ASC 2014-09 is to “recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services (Klimek & Welsh, 2014).” In other words, revenue will now be recognized when control of the good and/or service is transferred to the customer. Under the “old” standard, companies instead recognized revenue only when the risks and benefits were transferred to the customer, not ownership. One of the reasons for making this change was to recognize revenue in a way that properly represents a contract, in which there is an exchange of performance obligations, which are contract-enforced promises to transfer goods or services to a customer, for compensation between the contractor and the customer. Details explaining whether revenue should be recognized either (1) at a period in time or (2) over a period of time are discussed in depth later on in ASC 2014-09 (Sabates, 2014). Under this new standard, companies that are under contract are required to follow a five-step process when recognizing revenue: “Identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to...
Cited: Bramwell, J. (2014, May 28). FASB, IASB Unveil Final Standard on Revenue Recognition. Retrieved from Accounting Web: http://www.accountingweb.com/article/fasb-iasb-unveil-final-standard-revenue-recognition/223413
FASB. (2014, May 28). Accounting Standards Updates - 2014. Retrieved from Financial Accounting Standards Board: https://asc.fasb.org/asccontent&trid=49115764#51575860
Klimek, C., & Welsh, C. (2014, May 28). IASB AND FASB ISSUE CONVERGED STANDARD ON REVENUE RECOGNITION. Retrieved from Financial Accounting Standards Board: http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176164075286
Sabates, M. (2014, June 19). FASB Revenue Recognition Exposure Draft Becomes ASC 2014-09. Retrieved from Eisneramper Accountants & Advisors: http://www.eisneramper.com/fasb-revenue-recognition-asc-2014-09.aspx
Trainer, D. (2014, June 2). FASB Changes Standard For Revenue Recognition . Retrieved from Seeking Aplha: http://seekingalpha.com/article/2248463-fasb-changes-standard-for-revenue-recognition?page=2
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