The Financial Accounting Standards Board and the International Accounting Standards Board are developing a converged standard regarding revenue recognition that is expected to have an effect on all entities that adhere to US GAAP or IFRS. The standard is expected to be released in the first quarter of 2014.
The new standard can have a significant impact on the way that companies recognize and record revenue. The following are some of the important changes and hurdles that companies will face under the new standard:
New criteria for contract determination
Under the new standard, contracts and agreements must contain commercial substance (cash flows between the companies should be expected as a result of the arrangement), a commitment to perform obligations from both parties, and the identification of rights and responsibilities (including payment terms).
Disclosures regarding revenue recognition will need to include explanations for changes in balances, information about performance obligations, and identification of judgments made in the application of revenue recognition. Companies will also need to disclose the determination of the transaction price and the allocation to various performance obligations.
Disaggregation of performance obligations
Companies will be required to identify various components of a contract, specifically long-term contracts, and apply separate patterns of revenue recognition for those components, if considered necessary. For example, a software company would need to consider recognizing revenue on the software licensing component of a contract separately from the software upgrades included in the contract.
To learn more about these and other recent developments, please contact your local UHY LLP professional.