Are You Up-to-Date on New Revenue Recognition Practices?

Andy Powell

November 1, 2014

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
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
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
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.
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
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.

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
  4. Allocate the transaction
    price to the performance obligations
    in the contract.
  5. Recognize revenue when (or
    as) performance obligations are

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.

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
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

  • 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
    risks and rewards of the good or
    sold to a customer by requiring
    consideration of whether revenue is
    earned, realized, or realizable.
  • Variable
    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
    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
    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
    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
  • Collectability&m
    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
    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
    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

Dates for Public and Non-public

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

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,
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.