On May 27, 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customer: Topic 606. The new standard is the result of a project with the International Accounting Standards Board (“IASB”) to improve the financial reporting of revenue under U.S. GAAP and IFRS. The new standard provides a comprehensive revenue recognition standard that applies to a wide range of transactions and industries, including those that followed industry specific guidance, such as the construction, software, and real estate industries. The new standard should improve U.S. GAAP and IFRS by providing a framework to address revenue recognition issues, improving comparability of revenue recognition practices, simplifying the preparation of financial statements, and requiring enhanced disclosures.
Main Provisions The new standard is based on contracts between an entity and its customers to transfer goods and services. The core principle is an entity should recognize revenue to depict the transfer of goods and services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods and services. To achieve that objective, the entity should (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
Effective Dates For public entities the amendments will be effective for reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted.
For non-public entities, the amendments will be effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Non-public entities may elect to apply this guidance earlier, as of the following:
- An annual reporting period beginning after December 15, 2016, including interim periods within that reporting period.
- An annual reporting period after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017.
- An annual reporting period beginning after December 15, 2017, including interim periods within that reporting period.
Transition Entities should apply the amendments using the following two methods:
- Retrospectively to each prior reporting period presented, using practical expedients; or
- Retrospectively with the cumulative effect of initially applying this amendment recognized as the date of initial application.
FASB and IASB have established a joint transition resource group designed to inform Boards of interpretive issues likely to occur as implementation efforts begin. We encourage you to continue to watch for updates on the group’s discussions as they are made available.
Padgett Stratemann & Co. is committed to monitoring the situation in order to gain a greater understanding of the impact these changes will have upon the niches we serve. In the meantime, if you would like to discuss this or other changes affecting your business, please contact a member of our Audit Team in Austin at 512.476.0717, in San Antonio at 210.828.6281, or at www.padgett-cpa.com. Our team is equipped to provide you Service. More Than Expected. for all your CPA and business advisory needs.