New guidance on the timing of
companies’ revenue recognition has
been released by the bodies that
establish U.S. and international
accounting standards. The Financial
Accounting
Standards Board (FASB) and the
International Accounting Standards
Board (IASB) have been working for
over a decade on new guidance with the
intent to enhance comparability of
revenue
recognition practices across
companies, industries,
jurisdictions, and capital markets.
The new guidance applies to both
public and private companies.

FASB’s version was published in
Accounting Standards Update (ASU) No.
2014-09, Revenue from Contracts with
Customers, which will significantly
change U.S. Generally Accepted
Accounting
Principles (GAAP). Existing GAAP
contains various standards regarding
the recognition of revenue from
customer contracts, including a
variety of specialized standards that
are applicable
to certain industries or transactions.
The
ASU adopts a single process for all
companies and transactions. In certain
cases, companies will have different
timing for revenue and recognition
that could affect perceptions about
the
companies’ performances. Companies
will also have more disclosures in the
financial statements relating to the
contracts with customers.

The new guidance in GAAP and
International Financial Reporting
Standards have a core
principle—companies should
recognize revenue to depict the
transfer of promised goods or
services to customers in an amount
that reflects the consideration
(payment) that it expects to be
entitled to in exchange for the goods
or services.

Five-Step
Recognition Framework

In order to meet the core principle
of the ASU, the guidance specifies a
5-step process for when and how to
properly recognize revenue:

1. Identify the contract with
   a customer.
2. Identify the company’s
   performance obligations (or promises)
   under the contract.
3. Determine the transaction
   price.
4. Allocate the transaction
   price to the performance obligations
   in the contract.
5. Recognize revenue when (or
   as) performance obligations are
   satisfied.

Heightened
Disclosure Requirements

Expanded disclosure requirements
will require a cohesive set of
qualitative and quantitative
information about a company’s
contracts with customers. The required
disclosures will
include information about the nature,
amount, timing, and uncertainty of
revenue that is recognized.

Likely
Effects for Insulation Industry and
Related Sectors

It is widely expected that many
companies will record revenue earlier
under the new guidance. The guidance
will require companies to account for
the effects of variable consideration,
such as discounts, warranties, and
sales incentives. The main impact will
be with industries that routinely
enter into contracts that include
variable payment terms, which means a
contract
would include performance bonuses or
rights of return, or for industries
that sell goods or services in bundled
packages. Specific areas that need to
be considered in order to determine
the significance for your company
include:

• Transfer of
  control model—Revenue is
  recognized when, or as, each
  performance obligation is satisfied by
  the company, which is when
  control of the underlying goods or
  services is transferred to a customer.
  This is fundamentally different than
  most models found currently in GAAP,
  which are focused on the transfer of
  the
  risks and rewards of the good or
  services
  sold to a customer by requiring
  consideration of whether revenue is
  earned, realized, or realizable.
• Variable
  consideration—An estimate
  of the variable consideration that an
  entity ultimately expects to be
  entitled to is included in the
  transaction price to the extent it is
  probable that a significant reversal
  of cumulative revenue recognized will
  not occur when the underlying
  uncertainty is resolved. However, for
  licenses of intellectual property
  only,
  variable consideration from sales or
  usage-based royalties should only be
  included in the transaction price and
  recognized as revenue when the sales
  to end users or usage actually occurs
  and the performance obligations to
  which the royalties were allocated
  have been satisfied.
• Time value of
  money—The time value of
  money is taken into consideration in
  determining the transaction price and
  the amount of revenue
  recognized if the customer contract
  includes a significant financing
  component that benefits either the
  company or the customer. Basically,
  the question is whether the contract
  includes a
  provision requiring payment in advance
  by
  the customer, or delayed payment
  terms. The guidance acknowledges that
  the time value of money is disregarded
  if the amount of time that is expected
  to pass between customer payment and
  satisfaction of the underlying
  performance obligation is 1 year or
  less.
• Collectability&m
  dash;At contract inception and
  upon significant changes in facts and
  circumstances, collection of the
  amount to which a
  company will be entitled under the
  contract must be considered probable
  of occurring for the contract to be
  accounted for in accordance with the
  ASU. If the collectability threshold
  is not
  met, revenue recognition will be
  delayed.
  When considering the collectability
  threshold, the company must also
  consider whether the amount to be
  received should be adjusted for any
  price concessions that: 1) the company
  intends to
  offer the customer; or 2) the customer
  expects to receive based on the
  company’s customary business
  practices, published policies, or
  specific statements.
• Licenses—
  Licenses for intellectual
  property must be analyzed to determine
  whether they provide a 1) right to use
  the company’s
  intellectual property, or 2) access to
  the company’s intellectual property.
  An important consideration in this
  determination is whether the customer
  has rights to any future changes to
  the
  intellectual property and whether the
  rights to
  those changes represent a performance
  obligation that should be accounted
  for separately from the license.
• Costs related to
  customer contracts—
  Certain costs of obtaining or
  fulfilling a customer contract, such
  as sales commissions or set-up
  costs, must be capitalized if the
  costs meet specific criteria. The
  guidance acknowledges that
  capitalization of these costs is not
  required when the amortization period
  for the asset
  otherwise recorded would have been 1
  year or
  less.

Effective
Dates for Public and Non-public
Companies

The new ASU is effective for public
companies for annual reporting periods
beginning after December 15, 2016;
early implementation is not permitted.

For non-public companies,
compliance is required for annual
reporting periods beginning after
December 15, 2017. Early adoption is
permitted, but not earlier than
periods beginning
after December 15, 2016.

What to Do
Next

This summary is just a starting
point for gaining an understanding of
the ASU and some of the significant
changes the ASU could have on your
company’s recognition, measurement,
and
reporting of revenue from contracts
with customers and certain related
costs. Your future plans should
include a discussion with your Chief
Financial Officer, Controller,
Accountant, or
Certified Public Accountant in order
to begin
assessing the impact the ASU will have
on your company. Do not get caught by
surprise in 2016.