Magazine article The RMA Journal

New Accounting Rules on Horizon for Revenue Recognition and Leases

Magazine article The RMA Journal

New Accounting Rules on Horizon for Revenue Recognition and Leases

Article excerpt

Substantial new accounting rules from the FASB and IASB are on the way. Find out what bankers need to know about them.

MORE ESTIMATES AND judgments will be required of accountants under planned revenue recognition requirements. In general, the new model from the FASB and the IASB will accelerate revenue recognition and increase bad-debt expense in some situations.

Here are four key points to know:

* Under current generally accepted accounting principles (GAAP), revenue recognition is deferred when collectability is not reasonably assured. Under the new approach, revenue will be recognized based on the amount the company expects to be entitled to receive without regard for the credit risk (in other words, a customer's ability to pay).

* For sales of bundled goods or services, judgment will be required to determine whether a particular performance obligation in that bundle is "distinct." The decision to accelerate revenue recognition will depend on whether--and, if so, how--bundled sales are separated.

* For variable or contingent consideration, companies will need to estimate the amount they expect to be entitled to, limited to amounts due that are without a risk of significant revenue reversal. Currently, revenue can be deferred if the lack of a fixed or determinable price is caused by the possibility of price concessions or other factors.

* Companies using the percentage-of-completion method to recognize revenue may continue to do so. However, they will need to determine whether revenue is to be recognized over time or at a point in time.

Look out for these industries and transactions:

* Software: Revenue recognition will be accelerated for what is currently deferred (in other words, the undelivered elements of an arrangement).

* Telecommunications/cable: The practice of recognizing revenue only to the extent of the cash received will be replaced.

* Sales of real estate: Revenue recognition will be accelerated.

* Licenses: A distinction will be made between a transfer of intellectual property at a point in time versus providing access to intellectual property over time.

* Contracts: The standard will require capitalization of costs incurred as it relates to obtaining contracts.

Start thinking about the impact on your client's financial measures and covenants, as well as IT systems, sales and contracting processes, and internal accounting controls.

The new standard will be effective for public entities with fiscal years beginning after December 15, 2016, and for nonpublic entities with fiscal years beginning after December 15, 2017.

Companies can elect to transition to the new standard either retroactively or as a cumulative effect as of the date of adoption. …

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