The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have released a revised proposal that would create a single revenue recognition standard for U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). The standard is designed to streamline accounting for revenue across industries and correct inconsistencies in existing standards and practices. The new standard would also require businesses to disclose more information about revenue. The proposal, unlike the previous exposure draft, contains a detailed section of implementation guidance.
The revisions in Proposed Accounting Standards Update (Revised), Revenue Recognition (Topic 605)–Revenue from Contracts with Customers: Revision of Exposure Draft Issued June 24, 2010, appear to address many concerns contained in comment letters and other communications. It is likely that there will not be significant changes between this draft and the final standard.
The core principle of the revised proposed standard remains the same as that of the 2010 exposure draft: An entity would recognize revenue from contracts with customers when it transfers promised goods or services to the customer. Beyond eliminating some industry-specific rules, current U.S. GAAP will not change much under the proposed standard.
The core principle 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. The proposed model would apply to all contracts to provide goods and services to customers, except leases, insurance contracts and financial instruments.
Items contained in the standard include the following: (1) guidance on how to determine when a good or service is transferred over time; (2) simplified proposals on warranties; (3) simplified guidelines for how an entity would determine a transaction price; (4) modifications to the scope of the onerous test to apply to long-term services;(5) a practical expedient that permits an entity to recognize as an expense cost of obtaining a contract if it is for one year or less; and (6) an exemption from some disclosures for nonpublic entities that apply U.S. GAAP.
For more details on the proposal, including a summary of changes from the previous exposure draft and the identification of a five-step process for applying the model, click here for the complete Journal of Accountancy article. We will keep you posted on the status of this standard as it has not yet been enacted.
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