August 04, 2014
Article by Ira Kantor, Director, Tax & Business Services, "The New Revenue Recognition Standards Have Finally Arrived. Now What?" Featured in The Bottom Line
Well it’s finally here. After many years, many changes and much speculation, on May 28, 2014, the Financial Accounting Standards Board and the International Accounting Standards Board issued their converged standards on revenue recognition. While the new standards are not going to drastically change the way contractors recognize revenue, as many originally thought might happen, there will be changes in how contracts need to be analyzed. In addition, there will be changes in what needs to be disclosed in financial statements and possibly even changes in process and controls.
While the new standards are not effective until 2017 for public companies and 2018 for non-public companies, there may be changes that could impact income taxes, compensation plans and even debt arrangements, so steps should be taken now to address the changes.
The new standard is principle-based, which is a big change from the industry -specific guidance currently used. The following is a brief overview of the new revenue recognition standards and how they may impact contractors’ financial statements.The new revenue recognition model uses a five-step approach:
- Identify contract with the customer
- Identify separate performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to performance obligations
- Recognize revenue when (or as) performance obligations are satisfied