{"id":6832,"date":"2014-11-01T00:00:00","date_gmt":"2014-11-01T00:00:00","guid":{"rendered":"https:\/\/insulation.org\/io\/articles\/are-you-up-to-date-on-new-revenue-recognition-practices\/"},"modified":"2014-11-01T00:00:00","modified_gmt":"2014-11-01T00:00:00","slug":"are-you-up-to-date-on-new-revenue-recognition-practices","status":"publish","type":"articles","link":"https:\/\/insulation.org\/io\/articles\/are-you-up-to-date-on-new-revenue-recognition-practices\/","title":{"rendered":"Are You Up-to-Date on New Revenue Recognition Practices?"},"content":{"rendered":"

New guidance on the timing of
\ncompanies’ revenue recognition has
\nbeen released by the bodies that
\nestablish U.S. and international
\naccounting standards. The Financial
\nAccounting
\nStandards Board (FASB) and the
\nInternational Accounting Standards
\nBoard (IASB) have been working for
\nover a decade on new guidance with the
\nintent to enhance comparability of
\nrevenue
\nrecognition practices across
\ncompanies, industries,
\njurisdictions, and capital markets.
\nThe new guidance applies to both
\npublic and private companies.<\/p>\n

FASB’s version was published in
\nAccounting Standards Update (ASU) No.
\n2014-09, Revenue from Contracts with
\nCustomers, which will significantly
\nchange U.S. Generally Accepted
\nAccounting
\nPrinciples (GAAP). Existing GAAP
\ncontains various standards regarding
\nthe recognition of revenue from
\ncustomer contracts, including a
\nvariety of specialized standards that
\nare applicable
\nto certain industries or transactions.
\nThe
\nASU adopts a single process for all
\ncompanies and transactions. In certain
\ncases, companies will have different
\ntiming for revenue and recognition
\nthat could affect perceptions about
\nthe
\ncompanies’ performances. Companies
\nwill also have more disclosures in the
\nfinancial statements relating to the
\ncontracts with customers. <\/p>\n

The new guidance in GAAP and
\nInternational Financial Reporting
\nStandards have a core
\nprinciple—companies should
\nrecognize revenue to depict the
\ntransfer of promised goods or
\nservices to customers in an amount
\nthat reflects the consideration
\n(payment) that it expects to be
\nentitled to in exchange for the goods
\nor services. <\/p>\n

Five-Step
\nRecognition Framework<\/h2>\n

In order to meet the core principle
\nof the ASU, the guidance specifies a
\n5-step process for when and how to
\nproperly recognize revenue:<\/p>\n

    \n
  1. Identify the contract with
    \na customer.<\/li>\n
  2. Identify the company’s
    \nperformance obligations (or promises)
    \nunder the contract.<\/li>\n
  3. Determine the transaction
    \nprice.<\/li>\n
  4. Allocate the transaction
    \nprice to the performance obligations
    \nin the contract.<\/li>\n
  5. Recognize revenue when (or
    \nas) performance obligations are
    \nsatisfied.<\/li>\n<\/ol>\n

    Heightened
    \nDisclosure Requirements <\/h2>\n

    Expanded disclosure requirements
    \nwill require a cohesive set of
    \nqualitative and quantitative
    \ninformation about a company’s
    \ncontracts with customers. The required
    \ndisclosures will
    \ninclude information about the nature,
    \namount, timing, and uncertainty of
    \nrevenue that is recognized.<\/p>\n

    Likely
    \nEffects for Insulation Industry and
    \nRelated Sectors<\/h2>\n

    It is widely expected that many
    \ncompanies will record revenue earlier
    \nunder the new guidance. The guidance
    \nwill require companies to account for
    \nthe effects of variable consideration,
    \nsuch as discounts, warranties, and
    \nsales incentives. The main impact will
    \nbe with industries that routinely
    \nenter into contracts that include
    \nvariable payment terms, which means a
    \ncontract
    \nwould include performance bonuses or
    \nrights of return, or for industries
    \nthat sell goods or services in bundled
    \npackages. Specific areas that need to
    \nbe considered in order to determine
    \nthe significance for your company
    \ninclude:<\/p>\n

      \n
    • Transfer of
      \ncontrol model—<\/span>Revenue is
      \nrecognized when, or as, each
      \nperformance obligation is satisfied by
      \nthe company, which is when
      \ncontrol of the underlying goods or
      \nservices is transferred to a customer.
      \nThis is fundamentally different than
      \nmost models found currently in GAAP,
      \nwhich are focused on the transfer of
      \nthe
      \nrisks and rewards of the good or
      \nservices
      \nsold to a customer by requiring
      \nconsideration of whether revenue is
      \nearned, realized, or realizable.<\/li>\n
    • Variable
      \nconsideration—<\/span>An estimate
      \nof the variable consideration that an
      \nentity ultimately expects to be
      \nentitled to is included in the
      \ntransaction price to the extent it is
      \nprobable that a significant reversal
      \nof cumulative revenue recognized will
      \nnot occur when the underlying
      \nuncertainty is resolved. However, for
      \nlicenses of intellectual property
      \nonly,
      \nvariable consideration from sales or
      \nusage-based royalties should only be
      \nincluded in the transaction price and
      \nrecognized as revenue when the sales
      \nto end users or usage actually occurs
      \nand the performance obligations to
      \nwhich the royalties were allocated
      \nhave been satisfied.<\/li>\n
    • Time value of
      \nmoney—<\/span>The time value of
      \nmoney is taken into consideration in
      \ndetermining the transaction price and
      \nthe amount of revenue
      \nrecognized if the customer contract
      \nincludes a significant financing
      \ncomponent that benefits either the
      \ncompany or the customer. Basically,
      \nthe question is whether the contract
      \nincludes a
      \nprovision requiring payment in advance
      \nby
      \nthe customer, or delayed payment
      \nterms. The guidance acknowledges that
      \nthe time value of money is disregarded
      \nif the amount of time that is expected
      \nto pass between customer payment and
      \nsatisfaction of the underlying
      \nperformance obligation is 1 year or
      \nless. <\/li>\n
    • Collectability&m
      \ndash;<\/span>At contract inception and
      \nupon significant changes in facts and
      \ncircumstances, collection of the
      \namount to which a
      \ncompany will be entitled under the
      \ncontract must be considered probable
      \nof occurring for the contract to be
      \naccounted for in accordance with the
      \nASU. If the collectability threshold
      \nis not
      \nmet, revenue recognition will be
      \ndelayed.
      \nWhen considering the collectability
      \nthreshold, the company must also
      \nconsider whether the amount to be
      \nreceived should be adjusted for any
      \nprice concessions that: 1) the company
      \nintends to
      \noffer the customer; or 2) the customer
      \nexpects to receive based on the
      \ncompany’s customary business
      \npractices, published policies, or
      \nspecific statements. <\/li>\n
    • Licenses—
      \n<\/span>Licenses for intellectual
      \nproperty must be analyzed to determine
      \nwhether they provide a 1) right to use
      \nthe company’s
      \nintellectual property, or 2) access to
      \nthe company’s intellectual property.
      \nAn important consideration in this
      \ndetermination is whether the customer
      \nhas rights to any future changes to
      \nthe
      \nintellectual property and whether the
      \nrights to
      \nthose changes represent a performance
      \nobligation that should be accounted
      \nfor separately from the license. <\/li>\n
    • Costs related to
      \ncustomer contracts—
      \n<\/span>Certain costs of obtaining or
      \nfulfilling a customer contract, such
      \nas sales commissions or set-up
      \ncosts, must be capitalized if the
      \ncosts meet specific criteria. The
      \nguidance acknowledges that
      \ncapitalization of these costs is not
      \nrequired when the amortization period
      \nfor the asset
      \notherwise recorded would have been 1
      \nyear or
      \nless. <\/li>\n<\/ul>\n

      Effective
      \nDates for Public and Non-public
      \nCompanies<\/h2>\n

      The new ASU is effective for public
      \ncompanies for annual reporting periods
      \nbeginning after December 15, 2016;
      \nearly implementation is not permitted.\n<\/p>\n

      For non-public companies,
      \ncompliance is required for annual
      \nreporting periods beginning after
      \nDecember 15, 2017. Early adoption is
      \npermitted, but not earlier than
      \nperiods beginning
      \nafter December 15, 2016.<\/p>\n

      What to Do
      \nNext<\/h2>\n

      This summary is just a starting
      \npoint for gaining an understanding of
      \nthe ASU and some of the significant
      \nchanges the ASU could have on your
      \ncompany’s recognition, measurement,
      \nand
      \nreporting of revenue from contracts
      \nwith customers and certain related
      \ncosts. Your future plans should
      \ninclude a discussion with your Chief
      \nFinancial Officer, Controller,
      \nAccountant, or
      \nCertified Public Accountant in order
      \nto begin
      \nassessing the impact the ASU will have
      \non your company. Do not get caught by
      \nsurprise in 2016.<\/p>\n","protected":false},"excerpt":{"rendered":"

      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<\/p>\n","protected":false},"author":[268],"featured_media":0,"template":"","categories":[],"class_list":["post-6832","articles","type-articles","status-publish","hentry","author-andy-powell"],"acf":[],"yoast_head":"\nAre You Up-to-Date on New Revenue Recognition Practices? - Insulation Outlook Magazine<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/insulation.org\/io\/articles\/are-you-up-to-date-on-new-revenue-recognition-practices\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Are You Up-to-Date on New Revenue Recognition Practices?\" \/>\n<meta property=\"og:description\" content=\"New guidance on the timing of companies’ revenue recognition has been released by the bodies that establish U.S. and international accounting standards. 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