Tuesday, March 13, 2012

Changes in the Way We Recognize Revenue

This week's article is about changes to how accountants will recognize revenue for contracts come 2015.  Matthew G. Lamoreaux's article in the January 2012 issue of the Journal of Accountancy, discusses what these changes mean for accountants.

The Federal Accounting Standards Board (FASB) as well as the International Accounting Standards Board (IASB) have decided to create a single standard for recognizing revenue.  Lamoreaux says under a the new standard a company will recognize revenue from contracts as soon as it transfers goods and services.  This is not much of a change from how accountants already handle revenue under GAAP.

According to Lamoreaux the boards also included guidance on how to know a good or service is tranferred over time.  They also simplified proposals on warranties, how to determine transaction price, and modified the test to apply to long term service as well as provided some expemptions from some disclosures for private companies.

The accounting model they have proposed would be:

1.  Indentify the contract with a customer.

2.  Identify the seperate performance obligations in the contract.

3.  Determine the transation price.

4.  Allocate the transaction price to the separate performance obligations in the contract.

5.  Recognize revenue when the business satisfies a performance obligation.

This model is scheduled to go into effect on January 1, 2015 except for private companies, who have an extra year to implement as well as being exempt from some mandatory disclosures.

I personally can't tell the difference between this new standard from what I have already practiced in the professional sphere.  I did however find it interesting that despite the FASB's refusal to adopt or even converge with IFRS, it felt the necessity to write a new standard with the IASB on the recognition of revenue.

They are also handling implimentaion differently as well.  FASB is not allowing early implimentation which means that people will have to collect data for two years and then retroactively apply the new standard to it.  Whereas the IASB is allowing companies to implent the new standard as soon as they are ready.

I can understand why the IFRS vs GAAP debate has gone on for so long, FASB continues to send mixed signals whether it wants to be part of the international community or not.

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