By: Melisa Galasso
Blog Series: Revenue from Contracts with Customers
Post 1 of 6
With summer vacations upon us, many of us are looking for some good summer reading. If you are looking for a riveting text more than 700 pages in length, I’d recommend ASU 2014-09, Revenue from Contracts with Customers. Issued in May 2014, it was so large the Accounting Standards Update (ASU) was broken into three pieces before posting to FASB’s website. It is by far the largest overhaul of revenue recognition standards I’ve seen. It is also one of the few successes in convergence between the IASB and FASB. It replaces all the various industry guidance used today with a single principles-based approach to revenue recognition. It takes our four current criteria’s approach to revenue recognition and replaces it with a five-step, principles-based approach.
The ASU, as its name implies, only focuses on revenue recognition when it relates to a contract with a customer. So, for example, contributions to nonprofits are not impacted, as there is no contract and no customer. The five-step process debuted in the standard are:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The Accounting & Attestation (A&A) Committee has decided to analyze each step separately through a series of blogs to help our members understand the impact of these changes.
Companies can elect a retrospective approach with practical expedients or a full retrospective methodology.
In addition to changing how we account for revenue recognition, the ASU drastically increases the required disclosures for revenue recognition. Currently, very few disclosures are required and are often boilerplate in nature. The ASU will now require an entity to disclose disaggregated revenue into categories which depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. In addition, the ASU requires the disclosure of the opening and closing balances of receivables, contract assets, and contract liabilities. Additionally, disclosure is required of revenue recognized in the reporting period, which included in the contract liability balance at the beginning of the period, as well as revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods. The ASU also requires disclosures about performance obligations and the timing in which they are satisfied, significant payment terms, the nature of the goods or services; as well as information regarding returns, refunds, warranties, etc. It also requires disclosures about management’s judgments.
The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period for public business entities. Early application is not permitted for public business entities. All other entities get a one-year extension for the annual requirements and a two-year extension for interim reporting with early adoption permitted in limited situations.
Be on the lookout for more blogs on this topic as the summer continues!
Melisa is a Senior Manager in the Professional Practices Department at Cherry Bekaert, LLP, in Charlotte. She currently serves on NCACPA’s Accounting & Attestation Committee and is President of the Charlotte Chapter. Melisa can be reached at mgalasso@cbh.com.