|
FASB Issues Proposed Accounting Standards Update - Revenue Recognition Revenue is a crucial number to users of financial statements in assessing an entity’s financial performance and position. However, revenue recognition requirements in U.S. generally accepted accounting principles (GAAP) differ from those in International Financial Reporting Standards (IFRSs), and both sets of requirements need improvement. U.S. GAAP comprises broad revenue recognition concepts and numerous requirements for particular industries or transactions that can result in different accounting for economically similar transactions. Although IFRSs have fewer requirements on revenue recognition, the two main revenue recognition standards, IAS 18 “Revenue”and IAS 11 “Construction Contracts”can be difficult to understand and apply. In addition, IAS 18 provides limited guidance on important topics such as revenue recognition for multiple-element arrangements.
Accordingly, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRSs that would:
1. Remove inconsistencies and weaknesses in existing revenue requirements.
2. Provide a more robust framework for addressing revenue issues.
3. Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.
4. Provide more useful information to users of financial statements through improved disclosure requirements.
5. Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.
To meet those objectives, the FASB and the IASB are proposing amendments to the FASB Accounting Standards Codification® and to IFRSs, respectively. In December 2008, the Boards published the Discussion Paper, Preliminary Views on Revenue Recognition in Contracts with Customers. The Discussion Paper explained the Boards’ initial views on revenue, including some of the principles that they proposed as the basis of a future standard. After considering feedback received on the Discussion Paper, the Boards developed those principles into a draft standard.
In June 2010, the Boards issued the Exposure Draft, Revenue from Contracts with Customers.(The FASB’s version was a proposed Accounting StandardsUpdate.) The Boards received nearly 1,000 comment letters on the 2010 proposed Update and, in response, have revised various aspects of the June2010 proposals. (Appendix B of this proposed Update summarizes thoserevisions.) Although those revisions did not necessitate reexposure for publiccomment in accordance with the Boards’ due process procedures, the Boardsdecided to reexpose the proposals because of the importance to all entities of thefinancial reporting of revenue and the desire to avoid unintended consequencesof the final standard.
The guidance in this proposed Update would affect any entity that enters into contracts with customers unless those contracts are in the scope of other standards (for example, insurance contracts or lease contracts). In U.S. GAAP, the guidance in this proposed Update would supersede most of the revenue recognition requirements in Topic 605 (and related guidance). In IFRSs, the guidance in this proposed Update would supersede IASs 11 and 18 (and related Interpretations). In addition, the existing requirements for the recognition of a gain or loss on the transfer of some nonfinancial assets that are not an output of an entity’s ordinary activities (for example, property, plant, and equipment within the scope of Topic 360, IAS 16, Property, Plant and Equipment, or IAS 40, Investment Property) would be amended to be consistent with the proposed recognition and measurement guidance in this proposed Update.
The core principle of this proposed guidance is that an 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.
To achieve that core principle, an entity would apply all of the following steps:
1. Step 1: Identify the contract with a customer.
2. Step 2: Identify the separate performance obligations in the contract.
3. Step 3: Determine the transaction price.
4. Step 4: Allocate the transaction price to the separate performance obligations in the contract.
5. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
Source: FASB
|
