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FASB Changes to Revenue Recognition


The Financial Accounting Standards Board (FASB) and the International Accounting Standards Boards (IASB) undertook a convergence project to improve accounting for revenue. In May 2014 the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Since 2014, the FASB has continued to make refinements and modifications to the revenue recognition guidance.

The final update is effective for nonpublic companies for annual reporting periods beginning after December 15, 2018. This means that private companies with a calendar year-end will need to implement this new standard as of January 1, 2019.

The ASU supersedes virtually all revenue recognition requirements under existing GAAP. The new principles-based method of accounting includes a complex five step approach to recognizing revenue that requires significantly increased judgment and input from management. The new guidance will also require additional qualitative and quantitative information to be disclosed in the financial statements.

This standard is anticipated to have a significant impact not only in the way revenue is recognized but it may force companies to change their contract language, business practices, policies and procedures, and internal controls.

A brief description of the five steps is as follows:

Major changes within this standard include accounting for bundled products and services, variable consideration (bonuses, penalties, incentives, rebates, claims, liquidated damages, discounts, etc.), contract modifications, and options that provide a material right (loyalty programs, volume discounts, discounted renewal options, tier status, buy X get Y free options).

If you have not done so already, we recommend companies assemble an implementation team to determine the impact of the new standard. Each revenue stream within the business will need to be evaluated against the five-step model to determine changes from the previous accounting method.

This assessment will vary for each organization. The more customized the contracts, the more difficult analysis may be.

Accounting for revenue recognition is poised to take a large turn away from the methods and systems that have been in place for the last three decades. Proper research and preparation will be paramount in achieving a successful implementation.

If you have questions on how this will impact your business, please reach out to your Berntson Porter CPA to start the discussion by calling 425.454.7990. We’re here to help!