New Proposed ASU on Revenue Recognition

The joint project on revenue recognition of the FASB and the IASB has resulted in a recently released Exposure Draft. The Proposed Accounting Standards Update, Revenue Recognition (Topic 605), Revenue from Contracts with Customers was issued June 24, 2010 with a comment period ending October 22, 2010. The Proposed ASU was issued to improve both U.S. GAAP and IFRSs standards that cover revenue recognition by removing inconsistencies and weaknesses in existing revenue recognition standards and practices; providing a more robust framework for addressing revenue recognition issues; improving comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and simplifying the preparation of financial statements by reducing the number of requirements to which entities must refer.

Who is affected?
The proposed guidance would affect any entity that enters into contracts to provide goods or services that are an output of the entity’s ordinary activities, unless those contracts are within the scope of other requirements of U.S. GAAP or IFRSs.

You should be aware that the proposed guidance would supersede most of the guidance on revenue recognition in Topic 605. In addition, the existing requirements for the recognition of a gain or loss on the sale of some nonfinancial assets that are not an output of the entity’s ordinary activities (for example, property, plant, and equipment within the scope of Topic 360 or IAS 16, Property, Plant and Equipment, or IAS 40, Investment Property) would be amended to be consistent with the proposed revenue recognition and measurement requirements.

Main Proposals
The Proposed ASU specifies the principles that an entity would apply to report useful information about the amount, timing, and uncertainty of revenue and cash flows arising from its contracts to provide goods or services to customers. The core principle would require an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it receives, or expects to receive, in exchange for those goods or services.

It also specifies the accounting for some costs. An entity would recognize the costs of obtaining a contract as expenses when incurred. If the costs incurred in fulfilling a contract are not eligible for capitalization in accordance with other standards an entity would recognize an asset only if those costs relate directly to a contract; generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and are expected to be recovered.

The Proposed ASU also covers identifying the contract(s) with a customer; determining the transaction price;allocating the transaction price to the separate performance obligations; and recognizing revenue when a performance obligation is satisfied

The Proposed ASU requires disclosures to help users of financial statements understand the amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. An entity would be required to disclose more information about its contracts with customers than is currently required, including more disaggregated information about recognized revenue and more information about its performance obligations remaining at the end of the reporting period.

Effective Date
The Boards have not designated an effective date for this Proposed ASU.
The Proposed ASU is available for download at www.fasb.org

Tell us how you think it will affect your practice by adding a comment.

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