As we all know, the new revenue recognition standard will be effective for public companies for periods beginning after December 15, 2017. This change will have challenges for everyone. Even if the new five-step, contract based model does not dramatically change the timing of your company’s revenue recognition, documenting how the new model applies in your case will require some time, and all of us will have to deal with the significant increase in disclosures, particularly the requirement to disaggregate revenues.
One place we see some confusion is about what these challenges will look like. This new standard is a complete departure from our old revenue recognition guidance and the detailed, rule based nature of the old standards. Some writers still talk about the “hundreds of pages” of guidance that must be dealt with. This makes it sound like the new standard is a large collection of detailed rules that simply replaces the large collection of detailed rules in the old revenue recognition GAAP.
This is not the case.
In the ASU the core of the new revenue model starts on page 14 and ends with the last of the disclosures on page 48. Seems pretty short!
It is very principles base guidance! In our workshops, the broad, principles based nature of the new standard creates some of the biggest challenges for companies.
The whole standard is based on this principle, from paragraph 606-10-10-2:
“the core principle of the guidance in this Topic is that an entity shall 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.”
Notice the lack of language about an earnings process being complete or revenue being “realized or realizable”.
Each of the five steps and the disclosure requirements also start with a broad principle. Here is an example from step three, determining the transaction price (606-10-32-2):
“An entity shall consider the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.”
On interesting aspect of this principle is that if there is variable consideration in a contract, it must be estimated! That is a whole new principle and each company will have to assess how to apply it to their circumstances.
Because this new revenue recognition model establishes a whole new set of principles, the FASB knew we would all need some help in how to interpret these principles. So, the standard, after the disclosure requirements, includes a number of implementation guidance discussions to explain what the principles are intended to mean. Terms such as “satisfied over time” and “distinct within the context of the contract” are explored. But you won’t find any detailed rules.
After the implementation guidance are a number of examples, and here you can find some actual interpretations of the principles which are very helpful. There are not too many of them.
As a last source of support for your process of learning about these principles and how to interpret and apply them don’t forget about the TRG. While the TRG does not issue formal guidance, their discussions are rich with examples of how some very experienced professionals are interpreting the standard. And, as you may have heard, the SEC Chief Accountant has said if companies depart from TRG discussions, they should be prepared to support such positions to the SEC staff. (You can read more about that in this speech.)
So, our tip for today, as you move through your implementation be ready to build an understanding of the principles and how to apply them to your specific circumstances!
As always, your thoughts and comments are welcome!