Revenue Recognition 

    The FASB and IASB (Boards) will issue a single standard for revenue recognition, expected to be released in the second quarter of 2014, which would converge U.S. GAAP and IFRS and apply to all industries and transactions.

    The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. This standard has the potential to affect every entity’s day-to-day accounting and, possibly, the way business is executed through contracts with customers.

    The Boards tentatively decided that public entities will be required to apply the revenue recognition standard for annual and interim reporting periods beginning after December 15, 2016. Early adoption is prohibited for public entities. Nonpublic entities will be required to apply the revenue standard for annual and interim reporting periods beginning after December 15, 2017. Nonpublic entities may also elect to apply the revenue recognition standard for periods beginning after December 15, 2016 (the same as public entities but not earlier).

    The Boards tentatively decided that the revenue recognition standard could be applied retrospectively including any combination of practical expedients discussed, or recognize the cumulative effect of initially applying the new revenue recognition standard as an adjustment to the opening balance of retained earnings in the year of initial application.

    The Boards have provided a delayed effective date, and the AICPA will help practitioners use that time wisely to prepare for the transition to the new revenue recognition standard and the potential impacts on financial statements, information systems, processes and controls.

    News Updates:

    The IASB and the FASB met on October 30, 2013 and discussed the following topics to be included in the final standard on Revenue from Contracts with Customers:

    1. Constraint on estimates of variable consideration
    2. Implementation guidance: licenses
    3. Collectibility.
    Constraint on Estimates of Variable Consideration

    Objective of the Constraint

    The Boards tentatively decided to specify a confidence level in the objective of the constraint of probable. (For the IASB, the confidence level will be expressed as “highly probable.” The Boards acknowledge that different terms were necessary to convey the same outcome because of existing definitions in US GAAP and IFRS.)

    The Boards also tentatively decided that if an entity expects that including some, but not all, of the estimated amount of variable consideration (that is, a minimum amount) in the transaction price would not result in a significant revenue reversal, the entity should include that amount in the estimate of the transaction price. The objective of the constraint should be stated in the final revenue standard broadly as follows:

    An entity shall include an estimate of variable consideration in the transaction price to the extent it is probable that a significant revenue reversal will not occur. A significant revenue reversal will occur if there is a significant downward adjustment on the amount of cumulative revenue recognized from that contract with that customer.


    The Boards tentatively decided that an entity should update the estimated transaction price at each reporting date to represent faithfully the circumstances present at the reporting date and the changes in circumstances during the reporting period.

    Sales- and Usage-Based Royalties on Licenses of Intellectual Property

    The Boards discussed the pattern of revenue recognition that would result from the application of the constraint to licenses of intellectual property with sales- or usage-based royalties. In light of the resulting revenue pattern, the Boards tentatively decided to include a specific requirement for licenses of intellectual property in which the consideration is in the form of a sales- or usage-based royalty. That requirement specifies that an entity should include consideration from the sales- or usage-based royalty in the transaction price when or as the uncertainty has been resolved (that is, when the subsequent sales or usage occurs).

    Implementation Guidance: Licenses

    The Boards discussed improvements to the implementation guidance for licenses and to the criteria for distinguishing between two types of licenses—licenses that provide access to the entity’s intellectual property (that is, a performance obligation satisfied over time) and licenses that provide a right to use the entity’s intellectual property (that is, a performance obligation satisfied at a point in time).


    Collectibility – Transaction Price

    The Boards discussed assessments of customer credit risk (that is, collectibility) in the revenue model. The Boards affirmed previous tentative decisions to measure the transaction price, and therefore revenue, at the amount of consideration to which the entity is entitled (that is, an amount that is not adjusted for customer credit risk). The Boards also tentatively decided to clarify the requirements relating to estimates of variable consideration, specifically as they relate to assessing whether an entity has provided a price concession.

    Collectibility Threshold

    The Boards also tentatively decided to clarify the criteria that must be met before an entity can apply the revenue model to a contract with a customer by including an explicit collectibility threshold. To meet that threshold and apply the revenue model, an entity must conclude that it is probable that it will collect the consideration to which it will be ultimately entitled to in exchange for the goods or services that will be transferred to the customer. In making that assessment, the Boards noted that an entity would only consider customer credit risk and not other uncertainties, such as those related to performance or measurement, which would be accounted for in the timing of recognition and measurement of revenue. In setting the threshold, the Boards also acknowledged that the term probable has different meanings in US GAAP and IFRS; however, the Boards tentatively decided to set the threshold at a level that is consistent with current practice and existing standards for revenue recognition in US GAAP and IFRS.

    The FASB met on November 6, 2013 to discuss its compliance with the due process requirements to issue a final Accounting Standards Update on revenue, including a consideration of the expected costs and benefits. The Board directed the staff to draft a final Update for vote by written ballot. The staff will continue drafting the final Update.

    AICPA Activities:

    The AICPA has formed sixteen industry task forces to help develop a new Accounting Guide on Revenue Recognition,that will provide helpful hints and illustrative examples for how to apply the upcoming new Revenue Recognition Standard. The industries involved with this project are:

    1. Airlines
    2. Aerospace and Defense
    3. Broker Dealers
    4. Construction Contractors
    5. Depository Institutions
    6. Gaming
    7. Health Care
    8. Hospitality
    9. Insurance
    10. Investment Companies
    11. Not-for-Profit
    12. Oil and Gas
    13. Power and Utility
    14. Software
    15. Telecommunications
    16. Timeshare
    Stay tuned to more developments for this project after the final Revenue Recognition Accounting Standard is issued.
    The AICPA offers guidance and training on the Revenue Recognition Project, including:
    FASB and IASB Releases

    FASB has also released a summary comparison document Revenue Recognition—Potential changes to U.S. GAAP, which highlights anticipated key differences between current U.S. GAAP and the revised exposure draft, assists stakeholders in identifying key topics of potential change, and provides a mapping to key FASB pronouncements expected to be affected.

    The boards also maintain a project page with further information. (FASB, IASB)

    This standard has the potential to affect every entity’s day-to-day accounting and, possibly, the way business is executed through contracts with customers.

    AICPA Guidance and Advocacy Releases

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