It is time to revisit the discussion on changes to revenue recognition. Just to recap, the new standard requires that revenue is recognized when goods or services are transferred to a customer and for the amount the seller expects to be entitled, based on the five step process (not necessarily performed chronologically):
- Identify the contract with the customer
- Identify the separate performance obligations
- Determine the transaction price
- Allocate the transaction price to the individual performance obligations
- Recognize revenue as the performance obligations are satisfied
The new standard is effective for privately held companies for annual reporting periods beginning after December 15, 2018, with early adoption allowed for annual reporting periods beginning after December 15, 2016 (calendar year 2017!) (more…)
The new revenue recognition standard, or ASU 2014-09, was issued in May 2014. As we first started digesting the standard, we posted a blog on the 5-step process of revenue recognition (September 10, 2014 post). Due to the sweeping changes associated with this standard, it became clear early on that implementing the new standard was going to be a process. As a follow-up, we included an implementation update in the blog (March 18, 2015 post) but once again, there are more twists and turns for the newly issued standard.
The converged (FASB/IASB) revenue recognition standard was issued in May 2014, and a week later the Boards announced the formation of the “Joint Transition Resource Group for Revenue Recognition.” Given the pervasiveness of the new revenue recognition standard and, for U.S. constituents, migration to the unfamiliar and uncomfortable territory of “principles” over “rules,” it was apparent from the start that implementation issues would abound.
Now that the new revenue recognition guidance is issued, there is nothing left to do but figure out how to implement it. The new standard identifies a five-step process for recognizing revenue. Though it may seem fairly straight forward on the surface, applying the five-step process to your revenue streams may take a significant amount of time and thoughtful considerations. Additionally, your company’s contracts may need to be modified once all the intricacies of the standard have been considered.
The new accounting standard for revenue recognition is finally here! It’s officially referred to as ASU 2014-09 – Revenue from Contracts with Customers. FASB issued the final revenue recognition standard in May 2014. Now, after a couple of months have passed, many technical accounting sources are weighing in on the new standard’s concepts and implementation.
“The new converged revenue recognition standard that’s in the final stages of development by the FASB and the International Accounting Standards Board is expected to lead to at least some changes in financial reporting for virtually all entities that use US GAAP or IFRS.” That’s quite a daunting statement that introduces a Journal of Accountancy (“JOA”) article “Seven Changes New Revenue Standard May Bring.” The impact of this standard will affect companies with billions in revenue as well as privately-held companies. For technology companies, the new principles-based standard throws out the industry specific revenue recognition rules that influenced business practices.
Vendor Specific Objective Evidence or VSOE has boggled accountants for software companies since its inception in 1997. CEOs and CFOs of software companies may not understand all the ramifications of revenue recognition or VSOE until their company has gone through a financial statement audit. Even then, it is a fairly common to hear of a software company that is restating their financial statements because of issues with the application of the revenue recognition rules. The article, “Strategic Accounting – The Value of Vendor Specific Objective Evidence,” in the May 2013 edition of California CPA, clearly and concisely explains software revenue recognition rules. For CFOs that are fighting the revenue recognition battle within their organizations, here are three key points from the article that bear emphasizing…
Special revenue recognition rules exist for companies that offer software to customers through hosting arrangements, such as cloud computing solutions where the customer merely has the right to use the software. The good news is recognizing revenue for hosting arrangements is a simpler process than the normal software revenue recognition rules. However, as always, there are some catches…
In the midst of the buzz around the Groupon IPO in the last half of 2011, Groupon was forced to restate its pre-IPO revenues to nearly half of what was previously reported at the request of the SEC. Why? The SEC required Groupon to report its revenues at net proceeds (the amount a merchant actually pays Groupon to run an ad) instead of gross proceeds (the total out of pocket amount a customer actually pays to Groupon for an online coupon, which includes the merchant’s share). As we reflect on the lessons learned from this, it begs the question: What should you think about when reporting your revenues at gross vs. net?…