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Understanding Components Under New Revenue Standard

On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers. The new guidance, Accounting Standards Codification Topic 606 (Topic 606) is a major achievement in the Boards’ joint efforts to improve this important area of financial reporting. It also replaces nearly all current revenue guidance in ASC 605, including industry-specific guidance.

Currently, U.S. generally accepted accounting principles (GAAP) has complex, detailed, and disparate revenue recognition requirements for specific transactions and industries including, for example, software and real estate. As a result, different industries use different accounting for economically similar transactions.

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

On August 12, 2015, the FASB issued an ASU, which deferred for one year the effective date of the new revenue standard for public and nonpublic entities reporting under U.S. GAAP. Therefore, for public business entities, certain not-for-profit entities, and certain employee benefit plans, the effective date for Topic 606 is annual reporting periods, (including interim reporting periods within those periods) beginning after December 15, 2017. 

The effective date for all other entities is annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. 

Topic 606 only applies to arrangements where a counterparty meets the definition of a customer. The standard defines a customer as, "a party that has contracted with an entity to obtain goods or services that are an output of the entity's ordinary activities in exchange for consideration."

In certain transactions, a counterparty may not be a “customer” of the entity and may instead be a collaborator or partner that shares in the risks and benefits of developing a product to be marketed (i.e, joint operating agreement). 

The FASB did not provide further guidance for determining whether certain revenue-generating collaborative arrangements would be in the scope of the new guidance. 

With a team of financial management consultants that rival multinational firms, Dacarba LLC, a subsidiary of Opportune LLP, is capable of providing complex financial reporting solutions that can help any company navigate every facet of financial reporting—no matter how straightforward or complex.

Reid Brooks
Director
rbrooks@opportune.com