Revenue Recognition – It’s Time to Stop Procrastinating
As we all know, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) in May 2014. Subsequent to the issuance of the above update, the FASB has issued additional updates to review and clarify the original update in ASU No. 2014-09. The overall goal is to enhance the comparability of revenue recognition practices across organizations, regardless of the industry, and streamline the requirements for revenue recognition for both public and nonpublic entities. The update is effective for public entities, including public business entities, with annual reporting periods beginning after December 15, 2017. For all other entities, the update is effective for annual reporting periods beginning after December 15, 2018.
In order to achieve the overall goal of enhancing comparability and streamlining the requirements, the guidance aims to establish specific principles for an entity to apply in the recognition of revenue based on a contract. ASC 606-10-10-2 states, “The core principle of the guidance in this Topic is that an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” Similar contracts should receive consistent application by entities and ASC 606-10-10-4 includes discussion of practical expedients for utilizing estimates and assumptions across portfolios of contracts. The guidance outlines the following steps, as stated in ASC 606-10-05-4, in order to recognize revenue in accordance with the core principle:
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 above steps seem simple enough; however, we are all smart enough to realize there will be nuances and complexities to decipher as we maneuver our way through adoption and application. There is a plethora of information and resources available, including various implementation guides, to utilize as you begin the transition process to the new standard. As you consider the next step to take, remember the guidance does exclude certain contracts with customers; however, regardless of your industry, you need to examine your revenue streams and contracts to ensure compliance. The specific exceptions as outlined in ASC 606-10-15-2 are as follows:
- Lease contracts within the scope of ASC 840, Leases
- Contracts within the scope of ASC 944, Financial Services – Insurance
- Financial instruments and other contractual rights or obligations within the scope of the following:
- ASC 310, Receivables
- ASC 320, Investments – Debt and Equity Securities
- ASC 323, Investments – Equity Method and Join Ventures
- ASC 325, Investments – Other
- ASC 405, Liabilities
- ASC 470, Debt
- ASC 815, Derivatives and Hedging
- ASC 825, Financial Instruments
- ASC 860, Transfers and Servicing
- Guarantees (other than product or service warranties) within the scope of ASC 460, Guarantees
- Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.
As the time for implementation nears, we will continue to increase our communication over the guidance and issue additional information to provide more clarity. In the meantime, please reach out to any of us at PKM for additional questions or requests for various implementation tools.