Magazine article Strategic Finance

The New Revenue Recognition Standard

Magazine article Strategic Finance

The New Revenue Recognition Standard

Article excerpt

Accountants and finance professionals around the world will be affected by the new revenue recognition standard. IMA's technical committees provided feedback on exposure drafts and continue to advocate for members.

Greetings from the world of Professional Advocacy! IMA's technical committees--the Financial Reporting Committee (FRC), Small Business Financial and Regulatory Affairs Committee (SBFRC), and Technology Solutions and Practices (TS&P) Committee--continue to advocate on behalf of members on issues that impact the management accounting profession. Within the last year, these groups have expanded their outreach. While continuing to submit comment letters to standards setters and regulatory bodies, new efforts also include participation in roundtables, appointments to standards setters' advisory groups, columns in Strategic Finance, and presentations at IMA conferences and webinars.

One recent issue that the committees have addressed is the revenue recognition standard issued jointly on May 28, 2014, by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). During the course of the standard's development, the FRC and SBFRC provided the Boards with comment letters aimed primarily at ensuring that implementation challenges would be minimal.

The standard is effective globally for all but a few industries, so most of us in the accounting and finance profession will be impacted by it. Here's an overview of some of the key points you should be aware of.

Scope of the Standard

The standard is applicable to all contracts with customers. It defines a customer as a party that has entered into a contract with an entity for the purpose of acquiring goods or services that are the output of the entity's ordinary activities in exchange for consideration. A collaborator or a business partner isn't considered a customer.

Recognition and Measurement

The recognition and measurement guidelines in the standard are based on certain key principles. Specifically, revenue should be recognized where promised goods or services are transferred to customers. The amount of revenue recognized is equal to the consideration that the entity expects to receive for those promised goods or services.

The standard lays out a five-step approach for recognizing and measuring revenue:

1. Identify the contract with the customer. A contract is defined as an agreement that has all of the following characteristics:

* It is between two or more parties,

* It creates enforceable rights and obligations, and

* It is either a written or verbal arrangement or an arrangement implied by the entity's ordinary practices when conducting business.

2. Identify the separate performance obligations in the contract. An entity generally must account for each performance obligation separately.

3. Determine the transaction price based on the terms of the contract and the entity's customary business practices.

4. Allocate the transaction price to the separate performance obligations in a contract. If a contract has only one performance obligation, the transaction price is allocated entirely to that obligation. If there are multiple obligations, an entity must determine an appropriate allocation to those multiple performance obligations.

5. Recognize revenue as the entity satisfies a performance obligation, which is satisfied when a promised good or service is transferred to the customer. This can happen over time or at a single point. The transfer to a customer occurs when the customer obtains control of the item, which means the customer is able to both direct the use of the item and obtain basically all of the remaining benefits from the item. Certain types of arrangements or contract terms pose challenges in determining when a customer obtains control over a promised good or service. …

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