In our previous articles, we covered all five steps in the Five-Step Revenue Recognition Model (ASC 606) – identifying the contract, identifying performance obligations in the contract, determining the transaction price, allocating the transaction price, and recognizing revenue when/as performance obligations are satisfied.
If you have missed any of the five step series, you can find them here.
Now that we have identified the five steps that outline how to apply the standard, we are now going to explore transition methods.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), comes into effect for public business entities (PBE) for annual reporting periods beginning after December 15, 2017, including interim periods within that year. Therefore, a calendar year-end public entity will reflect the new standard in its first quarter ending March 31, 2018, each subsequent quarter, and also in the year ending December 31, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.
All other entities will adopt the standard for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. Therefore, a calendar year-end nonpublic entity will first apply the new standard for the year ending December 31, 2019. If it also prepares interim financial statements, the new standard will first take affect for those interim periods in 2020. Early adoption is permitted as of either:
An annual reporting period beginning after December 15, 2016, including interim periods within that year, or
An annual reporting period beginning after December 15, 2016 and interim periods within annual reporting periods beginning one year after the annual period in which an entity first applies the new standard.
Further, the SEC staff has indicated it will not object if an entity that qualifies as a PBE solely because its financial statements or financial information is included in another entity’s filing with the SEC adopts the new revenue standard using the effective dates applicable to private entities.
Topic 606 sets out a single and comprehensive framework for revenue recognition. It addresses virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance. For many entities, the timing and pattern of revenue recognition will change. In some areas, the changes will be significant and will require careful planning.
A comprehensive overview of the standard is available here.
Entities need to determine the impact of this new standard. They need to identify which contracts and transaction types will be impacted, determine which processes and systems will require modifications and communicate the impact to stakeholders.
Many entities enter into long-term contracts with customers that will straddle the transition dates (i.e., years beginning after December 15, 2016, 2017, or 2018). Topic 606 permits a number of different transition approaches; these various approaches will result both in different reported profit and loss and in different levels of complexity.
Although when issued in 2014 Topic 606 was fully converged with IFRS 15, subsequent amendments made by the FASB and IASB created minor differences.
Click here to download the complete transition article.