New Revenue Recognition – Five Steps You’ll Need to Know
The Financial Accounting Standards Board recently issued new revenue recognition guidance effective December 15, 2017, for public companies and December 15, 2018, for private companies. The new standard will affect all entities that enter into contracts to sell or purchase goods and services. Not familiar with revenue recognition? An often-misunderstood principle, revenue recognition determines the conditions under which revenue received. The guidance provided centers around five steps to implementing the new standards.
Step 1: Identify the contract under the new standard
Has the contract been approved and both parties committed either in writing or orally? Ensure the contract identifies the rights of both parties. Outline the payment
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Ask yourself the following questions to determine the transaction price:
• Do offers such as rebates and discounts alter what you will receive for the exchange?
• Will events such as weather conditions or market volatility significantly reduce the amount of consideration?
• Are you receiving payment significantly before or after the delivery?
• Are you being paid in cash? The goods or services should be measured at fair value if the customer is not paying cash.
• Do you owe the customer anything aside from the good or service within the contract?
Step 4: Allocate the transaction price to the performance obligations. When including several performance obligations in one contract, recognize the revenue for each. Estimate the price as if each of the items was sold to separate customers.
Step 5: Recognize revenue when or as the entity satisfies a performance obligation. Upon transfer of control, or when the customer can use the good or service, revenue is recognized. If the good or service transfers over a period of time, the revenue is recognized over a period of time as