A New System for Recognizing Revenue: Learn How the New Model in FASB's Revised Proposal Could Affect Your Business

EXECUTIVE SUMMARY * FASB's revised proposal would create a single revenue recognition standard across industries for both U.S. GAAP and IFRS. * proposal includes a detailed section of implementation guidance including: sale with a right of return, warranties, principal versus agent considerations, customer options for additional goods or services, customers' unexercised rights, nonrefundable upfront fees, licensing and rights to use, repurchase agreements, consignment arrangements, bill-and-hold arrangements, and customer acceptance. * Companies would apply the model using the five-step process: Step 1 : Identify the contract with a customer. Step 2: Identify the separate performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the separate performance obligations in the contract. Step 5: Recognize revenue when (or as) the business satisfies a performance obligation. * Private companies would have an extra year to implement the proposed and would be exempt from a number of mandatory disclosures. * Comments are due March 13 and can be submitted at fasb.org or iesb.org. ********** FASB and the International Accounting Standards Board (IASB) in November released a revised proposal that would create a single revenue recognition standard for both U.S. GAAP and IFRS. standard is designed to streamline accounting for revenue across industries and correct inconsistencies in existing standards and practices. new standard would also require businesses to disclose more information about revenue. Unlike the previous exposure draft released in June 2010, the latest proposal includes a detailed section of implementation guidance. boards said in a press release that they further refined their original following a review of nearly 1,000 comment letters on the 2010 ED and extensive outreach activities. revisions in Proposed Accounting Standards Update (Revised), Revenue Recognition (Topic 605)--Revenue from Contracts with Customers: Revision of Exposure Draft Issued June 24, 2010, appear to address many of the concerns raised in a December 2010 comment letter by the AICPA's Financial Reporting Executive Committee (FinREC) that also urged the boards to re-expose and redeliberate on the proposals. The revisions aren't going to please everybody, said Peter A. Margaritas, CPA, a Columbus, Ohio-based IFRS expert. it looks like the boards tried to address all comments in the new exposure draft and, more importantly, it's unlikely there will be many significant changes between what we're seeing now and the final standard. boards said they decided to re-expose the proposals because of the importance of the financial reporting of revenue to all entities and the boards' desire to avoid unintended consequences arising from the final standard. The core principle of this revised proposed standard is the same as that of the 2010 exposure draft: that an entity would recognize revenue from contracts with customers when it transfers promised goods or services to the customer, the boards said. If you read the proposal, it's clear that beyond eliminating some industry-specific rules, our concept of revenue [under current U.S. GAAP] will not change very much under the proposed new standard, said Paul B.W. Miller, CPA, an accounting professor at the University of Colorado in Colorado Springs. [ILLUSTRATION OMITTED] But the boards added guidance on how to determine when a good or service is transferred over time; simplified the proposals on warranties; simplified how an entity would determine a transaction price (including collectibility, time value of money and variable consideration); modified the scope of the onerous test to apply to long-term services only; added a practical expedient that permits an entity to recognize as an expense costs of obtaining a contract (if one year or less); and provided exemption from some disclosures for nonpublic entities that apply U. …