FASB Issues New Guidance For Revenue Recognition

Earlier this week, the Financial Accounting Standards Board (FASB) together with the International Accounting Standards Board (IASB) issued a converged standard for how to recognize revenue in customer contracts.

The objective of the new standard is "to establish the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers."

An overview of the update, the reason behind it, and what it seeks to accomplish can be viewed in the Accounting Standards Update No. 2104-09 on FASB.org. However, the sole authoritative source for U.S. GAAP, except for companies registered with the SEC, is the FASB codification.

The core principle established by the new standard is to "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."

The FASB has issued the following steps to achieve that core principle:

1. Identify the contract with a customer.
2. Identify the performance obligations in 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) the reporting organization satisfies a performance obligation.

   Additional guidance in the update included how to report incremental costs of obtaining a contract, the costs of fulfilling a contract and the necessary disclosures.

   The new standard is effective for public organizations for annual and interim periods beginning after December 15, 2016.