Revenue recognition is a critical measure for every company. It is used in many financial ratios to examine and compare companies. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) recognized that existing revenue recognition literature varied between their jurisdictions. Both frameworks needed upgrades. The two organizations worked together, and Accounting Standards Update (ASU) 2014-09 is the result of their joint efforts. This update will be part of the Accounting Standards Codification (ASC) as ASC 606. This replaces the existing revenue recognition literature in Topic 605.
Why is the FASB doing this? Revenue recognition has evolved into a complex and confusing set of regulations and requirements. In addition, these have been inconsistently applied and vary from industry to industry and country to country. Acquiring a new single core principle guideline is part of the FASB’s goal of converging US GAAP with International Financial Reporting Standards (IFRS). Upon implementation, IFRS and US GAAP will essentially share the same guidance on revenue recognition, substantially eliminating most differences.
Major aims of the ASC 606:
- Shared guidelines on revenue recognition for all industries, entities and jurisdiction.
- Eliminate irregularities and shortcomings in revenue requirements.
- Provide a more robust system for addressing and solving revenue issues.
- Provide more useful information for users of financial statements through enhanced disclosure requirements.
- Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.
This transformation will require entities to use more discernment. Some entities will be needed to make more estimates, for instance, for transactions with variable consideration. In addition, the increase in estimates and judgments is accompanied by an increase in disclosures. These disclosures will need to describe the estimation methods, inputs, and assumptions. All entities will need to update their accounting policies, procedures, and internal controls to conform to the new revenue recognition model.
Confused about what your company needs to do to
By Caprice Murray, Tensoft, a