Introduction
Beginning in 2014, the clock started ticking on FASB’s revenue recognition changes. With plenty of fair warning, the changes to revenue recognition including Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, along with subsequent updates from FASB are effective for nonpublic companies for fiscal years beginning after December 15, 2018. Subsequent updates—think ASU 2018-08—Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made—are not far behind (see our thoughts on this standard here). If they identify the transaction as nonreciprocal, the organization must complete consideration #2.
The overarching goal of the changes to revenue recognition is to converge disparate standards across industries, all while making the information more useful to users. The core principle of the standard is that “the organization should recognize revenue to depict the transfer of goods or service in an amount that reflects the payment for which the organization expects to be entitled for those goods and services.”
A five-step process―a simplified approach
To achieve that core principle, an organization will need to apply a five-step model to some of their revenues streams:
- Identify the contract(s) with a customer
- Identify the separate performance obligations
- Determine the transaction price
- Allocate the transaction price to the separate performance obligations
- Recognize revenue when or as a performance obligation is satisfied
While the process can be broken down into five simple steps, the task of reviewing revenue streams and specific contracts can be quite daunting in implementation.
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