The new-and-improved revenue recognition rules go live in 2018 for calendar-year public companies. But many organizations have taken a wait-and-see approach, patiently holding out until the AICPA’s Financial Reporting Executive Committee (FinREC) works through industry-specific concerns. Now that additional interpretive guidance has been drafted, it’s time for your company to get serious about implementing the changes to how it reports contract revenue.
New standards bring sweeping changes
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The updated guidance eliminates about 180 pieces of industry-specific revenue accounting guidance in U.S. Generally Accepted Accounting Principles (GAAP). Instead, companies will need to calculate the top lines in their income statements using a single, principles-based approach.
The breadth of change that will be experienced depends on the industry. Companies that currently follow specific industry-based GAAP, such as software, real estate, asset management and wireless carrier companies, will feel the biggest changes. Nearly all companies will be affected by the expanded disclosure requirements.
Opposition prompts a delay
The updated revenue recognition guidance has encountered significant opposition from companies and trade groups because of the timing of the proposed changes, the lack of available information technology resources in the workplace, and the difficulty of updating internal controls and accounting policies. The new rules require management to make more judgment calls based on overriding principles.
In July 2015, the FASB agreed to give companies an extra year to comply with this landmark standard. Now the changes will go live for public companies with fiscal years that start after December 15, 2017. Private companies will apply the standard in fiscal years that start after December 15, 2018. For all companies that have already begun implementing the new standard, the FASB permits early adoption in fiscal years that begin after December 15, 2016.
The delay has given companies some extra breathing room to prepare for the sweeping changes to their income statements. It also gave the AICPA’s FinREC time to meet and fine-tune the details of its interpretive guidance for practitioners.
The FASB has also created its own Transition Resource Group (TRG), which met regularly over the last two years to discuss various implementation issues. Because of the TRG’s decisions, the FASB issued a number of amendments, including ASU No. 2016-12, Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which was issued on May 9, and ASU No. 2016-10, Revenue From Contracts With Customers (Topic 606): Identifying Performance Obligations and Licensing, which was issued on April 14.
FinREC meetings lead to interpretive guidance
In July 2016, the FinREC published working drafts of interpretive guidance to address specific implementation issues related to the revenue recognition standard. The 20 drafts apply to nine industries:
- Aerospace and defense,
- Engineering and construction contractors,
- Health care,
- Asset management,
- Not-for-profit organizations, and
The drafts will help U.S. companies implement the principles-based guidance by providing industry-specific examples. For instance, the aerospace and defense implementation issues relate to contract offsets, in which an aircraft supplier might offset some of the purchase price with a foreign government by agreeing to buy spare parts from an affiliate of the customer or entering into a side agreement to build a factory in the foreign nation.
The airline issues relate to such subjects as estimating the costs — including commissions to a travel agent or the customer reward points — for ticket sales. The health care issues include examples of the portfolio approach that some medical organizations use as a shortcut for dealing with a large number of similar patients.
The FinREC wants comments to its drafts submitted by September 1. Then, by January 2017, the AICPA plans to publish the interpretive guidance along with a brief for audit committees to help them understand how to comply with the revenue standard.
Time is running out
With the publication of the drafts of this interpretive guidance, most of the kinks in the revenue recognition guidance seem to have been worked out. The more recent TRG meetings have dealt with issues that are less pressing than the sessions held in the first few months following the standard’s publication. In fact, the FASB recently canceled its July 2016 meeting because the panel’s most recent meeting in April produced little disagreement over the issues on the agenda.
The International Accounting Standards Board, which also updated its revenue recognition guidance in 2014, ended its involvement with the TRG at the end of 2015. Now FASB members are debating how much longer to keep the panel active. With no more major issues left to decide, it’s now time for you to get serious about implementing the changes, if your company hasn’t yet started the implementation process.
Sidebar: Refresher on revenue recognition updates
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, is expected to produce a major shift in how companies report revenue. For simple point-of-sale retail transactions, revenue is realized when goods or services are delivered to the customer. The process gets more complicated for long-duration, multi-element contracts, sales that include incentives for customers with poor credit, and contracts with built-in discounts or performance bonuses.
Under the new guidance, companies must follow five steps when deciding how and when to recognize revenues:
- Identify a contract with a customer.
- Separate the contract’s commitments.
- Determine the transaction price.
- Allocate a price to each promise.
- Recognize revenue when or as the company transfers the promised good or service to the customer, depending on the type of contract.
In some cases, the new rules will result in earlier revenue recognition than in current practice. This is because the new standard will require companies to estimate the effects of sales incentives, discounts and warranties.