Watch for New Revenue Recognition Standard

by Ken Urish 27. December 2011 15:37

 

As we witnessed recently in the buildup to Groupon’s IPO, the manner that revenue is recognized is a critical accounting issue. In Groupon’s case, they were forced to restate their financial statements. Revenue recognition has been the cause of audit failures and the focus of corporate abuse and fraud for many years. However, new standards, currently expected to be issued in 2012, are intended to improve the financial reporting of revenues.  Following is an update on the status of the proposed new standards.

In November 2011, the Financial Accounting Standards Board (FASB) updated a measure on the financial reporting requirements for recognizing revenue from contracts with customers. The FASB, along with the International Accounting Standards Board (IASB), have made a number of changes to a joint exposure draft, first issued in June, 2010.  According to a press release, both boards have “further refined their original proposals” following review of nearly 1,000 comment letters. The boards are reviewing 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 boards agree that “an entity would recognize revenue from contracts with customers when it transfers promised goods or services to the customer.”  In addition, in its 221-page proposal, 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 determines a transaction price (including collectability, 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.S. GAAP. The proposal contains 26 examples of how the revised revenue recognition requirements would work. 

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