REVENUE RECOGNITION

In May 2014, the IASB and FASB converged the Revenue Recognition Standard. Since I’ve received a dozen or more notices on this, I thought it would be relevant to discuss this topic at length so our Week 4 will include not only foreign currency exposure but all revenue recognition.

As reported by the IFRS,

“The convergence of the standard on the recognition of revenue from contracts with customers will improve financial reporting of revenue and improve comparability of the top line in financials globally.”

The comparability of financials is the key to the convergence of reporting worldwide.

It is important to understand that with the new standard

· all previous practices are no longer valid.

· Any industry exceptions or special rules are void.

· Every business will be following this new single standard.

My perspective is that it should simplify revenue recognition since there will no longer be any industry-specific guidance.

JOURNAL OF ACCOUNTANCY

On May 28 (see attached file specific to this topic) and again on June 2 (included in file labeled IASB and FASB converge standard), the Journal posted six things to consider as guidance with this new standard. I’ve listed the six items below…for details open either of the files I referenced above)

1. Disclosures are a big key.

2. Software, telecom, and real estate will be most affected.

3. IFRS will become more rigorous.

4. The transition resource group will provide some direction.

5. Sales of nonfinancial assets may be represented better

6. The transition date is firm.

ACCOUNTING POLICY & PRACTICE SPECIAL REPORT

The above-reference report was copyrighted in 2014 by Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.

The report is 60 plus pages, but I wanted to highlight a few areas taken directly from the report:

· Scope

· Core Principle

· Ten Most Important things to Know about the New Guidance

SCOPE

“The new rules provide guidance relevant to an entity’s accounting for revenue that arises from a contract with a customer to transfer goods or services as well as contracts to transfer nonfinancial assets, unless those contracts are within the scope of other guidance. The rules do not apply to revenue that arises from other types of events (e.g., revenue that arises from a change in the value of an assets). The following types of contracts are outside the scope of the new rules:

· Leases (ASC840, Leases);

· Insurance contracts (ASC944, Financial Services-Insurance);

· Financial instruments and other contractual rights or obligations that are within the scope of other ASC Topics;

· Guarantees (other than product or service warranties) that are within the scope of ASC460, Guarantees; and

· Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers, or potential customers.”

CORE PRINCIPLE

“The new revenue guidance is based on the core principle that a reporting entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ”

TEN MOST IMPORTANT THINGS TO KNOW ABOUT THE NEW GUIDANCE

1. Most industry-specific guidance is out; thus, the new approach is more reliant on professional judgment and contract terms and conditions

2. All entities that enter into contracts with customers to transfer goods or services will be affected in some way by the new rules unless the contract is specifically excepted from application of the revenue standard.

3. The key to revenue recognition under the new approach is the “transfer of control” (not the transfer of risks and rewards or the culmination of an earning process).

4. A single contract may contain a different number of performance obligations than under current US GAAP.

5. Collectability is a criterion for determining whether a contract exists but does not affect the measurement of transaction price.

6. The new rules introduce a constraint on revenue that applies to variable consideration (i.e., rebates, refunds, credit and incentives).

7. The approach to accounting for long-term contracts has changed.

8. The approach to accounting for licenses has changed

9. All reporting entities will allocate the transaction price to the good or service underlying each performance obligation on a relative stand-along selling price basis.

10. For public entities applying US GAAP, the new rules are generally effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods therein. Early application is prohibited.

Obviously, this standard will take time to implement. The timeline was as follows:

· U.S. Public Companies — annual reporting periods beginning after 12.15.16

· Companies using IFRS — annual reporting periods beginning on or after 1.1.17

In July 2015 FASB delayed revenue recognition effective date by one year.

FY beginning after 12/15/17 for Public Companies

FY beginning after 12/15/18 for Private Companies

The IASB has also proposed a one-year delay.

Check the following link for details:

http://www.journalofaccountancy.com/news/2015/jul/revenue-recognition-effective-date-extended-201512608.html

Fast forward to May 2020 and you will learn that FASB voted to delay the effective date for private companies again in response to the COVID-19 impact. The board voted on Wednesday, May 20 to give private companies and not-for-profit organizations an extra year to comply with the revenue recognition and leases standards.

For private companies and private not-for-profits, the effective date will be for fiscal years beginning after Dec. 15, 2021 and interim periods within fiscal years beginning after Dec. 15, 2022.

Here’s the link for details…

https://www.journalofaccountancy.com/news/2020/may/fasb-delays-revenue-recognition-for-private-companies-amid-coronavirus.html?utm_source=mnl:alerts&utm_medium=email&utm_campaign=20May2020&utm_content=button

Others and policies impacted (reference file New Standard Could Affect Tax Practitioners for details)

· Tax practitioners

· Auditors

· Transfer pricing policies (Week 7 topic)

· SEC Staff Accounting Bulletin 74

· License revenue

Components of the new standard are open to interpretation, which ties to a principle-based approach vs a rules-based approach.

Remember: Both US GAAP and IFRS are both principles and rules based with GAAP being more rules based and IFRS principles based.

In the April 29, 2016 AICPA CPA Letter Daily, the news was to go to the definitive source for AICPA revenue recognition tools….

The revenue recognition standard eliminates the transaction- and industry-specific guidance under current US GAAP and replaces it with a principles-based approach for determining revenue recognition. Visit the link below to find comprehensive resources.

https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/revenuerecognition/

FINAL NOTE: The revenue recognition standard (IFRS 15) is comprehensive and also ties to IAS 11 and 18. It has had a significant impact on public companies and effective this December 2018 private companies will be using the standard. Implementing the standard is no easy task.

Homework Assignment

Read up and research this new standard and write a paragraph or two (in your words) on any issue that you find interesting or intriguing. Please cite your source(s). You should also include reflection on your MNC and the impact, if any, it will have. Post your report in this week’s discussion area by nlt Saturday evening under the Foreign Currency Exposure & Revenue Recognition topic.

Reminder: By the end of Week 4, you are required to also respond to at least one other post.