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What You Need To Know About Revenue Recognition

Revenue is one of the most important measures used by investors in assessing a company’s performance and prospects. However, revenue recognition guidance differs in U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)—and many believe both standards are in need of improvement.

Presently, U.S. GAAP has complex, detailed, and disparate revenue recognition requirements for specific transactions and industries including, for example, software, real estate, and construction contracts.

As a result, different industries use different accounting for economically similar transactions. Conversely, IFRS has two main revenue recognition standards with limited implementation guidance that many believe can be difficult to understand and apply.

During the first half of 2014, the FASB and the IASB will issue new accounting standards for recognizing revenue from contracts with customers. This new guidance is the result of the FASB’s joint project with the IASB to improve and converge revenue recognition rules. The new guidance will replace numerous, industry-specific U.S. GAAP revenue recognition requirements that are very difficult to sustain as industries evolve. It also will replace the two main IFRS standards that have limited implementation guidance and can be difficult to understand and apply.

The objective of the new guidance 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.

The objective of the new guidance 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. It will:
⦁ Provide a more robust framework for addressing revenue issues as they arise
⦁ Increase comparability across industries and capital markets
⦁ Require better disclosure so investors and other users of financial statements better understand the economics behind the numbers.
The new guidance establishes the following core principle:

Recognize revenue in a manner that depicts the transfer of 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.

A company or other organization will apply the following five steps to achieve the core principle:

Industries that are likely to experience the most changes include telecommunications, aerospace, construction, asset management, real estate and software.