Nonprofit Accounting Basics

Revenue Recognition Standard: Implementation Considerations and Disclosure Requirements

Author: 
Topics: 

On May 28, 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued substantially converged final standards on revenue recognition. These final standards are the culmination of a joint project between the Boards that has spanned many years. The FASB’s Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), was issued in three parts:

• Section A, “Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40);”

• Section B, “Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables;” and

• Section C, “Background Information and Basis for Conclusions.”

ASU 2014-09 provides a robust framework for addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current Generally Accepted Accounting Principles (US GAAP). As a result of these changes, the implementation of the new guidance should improve comparability of revenue recognition practices across entities and industries. The FASB provided significantly delayed effective dates for its guidance given the broad applicability and potentially significant ramification of the guidance in the ASU.

Key Impacts

Entities that expect significant changes in their revenue recognition policies or find that new information must be captured to comply with the new recognition, measurement, and disclosure requirements of the revenue standard, will need to examine its impact throughout the entity. Implementation efforts may need to include resources from areas such as tax, IT, marketing and sales, internal control, financial planning and analysis, human resources and compensation and benefits.

• Entities must develop strategies to capture the additional information needed for the new requirements and disclosures.

• Implementation efforts may need to include resources throughout the entity, outside of the accounting and finance functions.

Identifying Information Gaps for Applying New Requirements

After developing an understanding of the standard, the entity’s next step is to analyze its current revenue policies and disclosures in order to map them against the new requirements. This will aid the entity in identifying any potential gaps, including the need to revise its accounting policies and expand its financial statement disclosures. Factors to consider during the gap analysis include:

• Arrangements with customers that are subject to transaction, or industry-specific revenue guidance that is being superseded;

• Customer contracts with unique revenue recognition considerations or terms and conditions;

• The degree of variation in the nature and type of goods or services being offered;

• The pattern in which revenue is currently recognized (point-in-time versus over-time);

• The current accounting treatment of costs incurred to acquire or fulfill a contract with a customer; and

• Additional disclosure requirements.

Disclosures

The new standard contains expanded interim and annual disclosures to help financial statements users understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including:

• Disaggregation of revenue;

• Significant changes in contract assets and contract liabilities;

• When the performance obligations are typically satisfied and significant payment terms, and amounts allocated to remaining performance obligations and when these amounts are expected to be recognized as revenue;

• Significant judgments and changes in judgments including how the transaction price was determined and allocated to performance obligations;

• Costs capitalized in obtaining or fulfilling contracts; and

• Practical expedients elected.

Internal Controls: Key Consideration

Entities should consider the need to design and implement new internal controls or modify existing controls to address risk areas resulting from new processes, judgments, and estimates. New risk areas may arise from changes to information technology systems and reports that provide data inputs used to support the new estimates and judgments. To the extent that data is needed to comply with requirements of the standard, entities will need to consider the internal controls that will be necessary to ensure the completeness and accuracy of this information, especially if the data was not previously captured. Because the standard requires new judgments and perhaps additional analysis, entities should assess the skill level, resource capacity, and training needs of the employees who will be responsible for performing these tasks.

Communication Plan and Auditor Coordination

Communication between management, the audit committee, and the external auditor is key to ensuring successful implementation of the standard. Management should discuss key transition considerations with the audit committee, including:

• Whether the entity expects a significant change to its current accounting policies and disclosures;

• Historical data availability and the importance of showing a consistent story about revenue trends;

• The entity’s readiness for change, including IT systems and accounting, legal, sales, and tax knowledge of the new standard;

• Whether the entity has long-term contracts, including their volume, duration, uniqueness, and significance; and

• Comparability with industry peers.

Entities should also involve their external auditor in the implementation planning that includes developing milestones and touch points to ensure that accounting decisions, judgments, estimates, and internal control considerations are vetted to minimize surprises later in the process.

Due to the deferral of the effective date of ASU 2014-09, public entities must apply the new revenue standard to annual reporting periods beginning after December 15, 2017, while nonpublic entities have until December 15, 2018 to adapt the new standard.