Revenue is one of the most important measures used by investors in assessing a company’s performance and prospects. Presently, generally accepted accounting principles (GAAP) requires complex and disparate revenue recognition calculations within industries where revenue recognition is tied to contracts, including, for example, software and real estate. As a result, different industries use different accounting calculations for economically similar transactions, creating a problem in comparing revenue across multiple entities.
To solve this problem, new guidance has been issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in regards to FASB Topic 606: Revenue from Contracts with Customers. The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts. The new guidance:
- Removes inconsistencies and weaknesses in existing revenue requirements;
- Provides a more robust framework for addressing revenue issues;
- Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets;
- Provides more useful information to users of financial statements through improved disclosure requirements; and
- Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer.
The new Revenue Recognition Standard eliminates transaction based accounting calculations and replaces is with a principle based approach.
The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services.
The standard requires all entities to adopt by the following dates:
- For Public Companies- Jan 2017
- For Non-Public Companies – Jan 2018
- For Non-Profit Companies – Jan 2018
Adopting the new guidance could require companies to restate revenue from previous periods. How an organization chooses to adopt the revenue recognition standard will dictate how far back the entity must look.
Our team is already helping clients to evaluate changes from current GAAP to new standard and providing assistance as needed. Please feel free to contact the Vonya Global team for more information.