Four revenue recognition adoption tips as 2020 effective dates approach

If your company hasn’t yet begun implementing the changes to revenue recognition, now is the time to start.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, which introduced Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. ASC Topic 606 supersedes long-standing, industry-specific guidelines and fundamentally changes how companies across nearly every industry should recognize revenue.

While some companies have adopted ASC Topic 606 prior to the recent issuance of ASU 2020-05, which deferred the effective date, others have yet to implement the new accounting standard. Here are four considerations for your entity as it begins its revenue-recognition implementation efforts.

Background

ASC Topic 606 was the result of the FASB’s joint project with the International Accounting Standards Board (IASB) to improve the financial reporting of revenue. Legacy Generally Accepted Accounting Principles (GAAP) is composed of broad revenue recognition concepts and detailed guidance for particular industries, which often resulted in different accounting for similar transactions.

The purpose of the new revenue recognition standard is to eliminate inconsistencies in how businesses across industries account for similar revenue transactions by providing a comprehensive revenue recognition model that applies to a wide range of industries.

1. Review the revisions

Using a new five-step accounting process, ASC Topic 606 establishes comparability within financial reporting across industries by applying a uniform framework to revenue recognition. Much of legacy GAAP is built around a risks-and-rewards notion, where revenue is recognized when substantially all of the risk of loss from the sale of goods or services has passed to the customer. In contrast, the trigger for revenue recognition under ASC Topic 606 is based on the transfer of control of a good or service to the customer.

The basic principle within ASC Topic 606 is that a company should recognize revenue when it transfers goods or services to a customer in an amount in which it expects to be entitled to receive from the customer. The new five-step revenue accounting process is as follows:

1. Identify the contract with a customer