June 9th, 2014 by Ed Bannen
FASB and the IASB have finally decided to agree on a major topic as part of the convergence project and it’s a BIG ONE, revenue recognition rules. Who is affected? EVERYONE, but on varying degrees. FASB Chairman Russell Golden, believes software, telecommunications and real estate companies will see the largest change on their income statements. From the top level view, it appears all of these types of companies will most likely be able to recognize revenue sooner on the new model. Obviously, it’s a positive for any of these companies trying to attract investors and possibly a negative for private companies who want to keep income small for Uncle Sam.
So why is this change so big? The U.S. has 100’s of industry specific rules and guidance around revenue recognition. This new pronouncement, in effect, will change most of the rules and guidance previously used. That being said, any time you drastically change something in accounting, there will be numerous pronounces and guidance materials issued to clarify the standard and ensure that aspects aren’t being misinterpreted. Thus, we will just be replacing previous used guidance with newer versions in the coming years. The major difference in the standard is the ideology switching from a strict practice-based approach to a principle-based approach which will require more judgment in its justification.
Companies would recognize revenue through a five-step process:
After reading the steps above, I know what you’re thinking; that sounds pretty close to the same principles that we already have. A deeper dive would reveal that there will be more judgment and estimates used with these principals which will require periodic updating. This could lead to an increased number of adjustments to the financial statements for changes in estimates in periods following the sale. In addition, expanded disclosures will be required to explain these estimates and provide justification.
So the next big question, WHEN?
For further questions or concerns about how these new revenue recognition principals will affect your business, please contact GBQ and together we can make this transition smooth and seamless for your company!