Accounting Standard Update Issued by FASB Concludes Decade Long Project
The Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) on May 28, 2014, as a conclusion to a decade long joint project with the International Standards Board (IASB) to clarify principles for recognizing revenue for industries worldwide.
The objective of the new guidance is as follows:
- Improve comparability of revenue recognition principles across entities and industries from all countries governed by either the FASB or IASB
- Provide more useful information to financial statement users
- Simplify the preparation of financial statements by reducing the number of requirements to which an organization must refer and providing a more robust framework for addressing revenue recognition issues
The core principle of ASU No. 2014-09 is to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The following five steps should be performed to achieve this core principle.
- Identify the contract with a customer
- Identify the performance obligations (promises) in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the reporting organization satisfies a performance obligation.
The new standard will require entities to provide financial statement users with information regarding the entity’s contracts with customers.
ASU 2014-09 is effective for periods beginning after December 15, 2016, including interim reporting periods within that reporting period for all public entities. Early application is not permitted.
For nonpublic companies, ASU 2014-09 is effective for periods beginning after December 15, 2017 and interim periods within annual periods after those reporting periods. A nonpublic company may elect early application, but no earlier than the effective date for public entities.