On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers (Topic ASC 606)
- The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.
- It supersedes most current revenue recognition guidance, including industry-specific guidance.
- Affects all entities: public, private, and not-for profit that enter into contracts with customers to transfer goods or services.
The FASB provided this framework for businesses to recognize revenue more consistently. The standard’s purpose is to eliminate variations in the way businesses across industries handle accounting for similar transactions. The lack of standardization in financial reporting has made it difficult for investors and other consumers of financial statements to compare results across industries, and even companies within the same industry.
The objective of the new standard is to establish the principles that an entity shall apply to report useful information to users of financial statements about the:
- Timing, and
- Uncertainty of revenue and cash flows arising from a contract with a customer.
To meet the objective, an entity shall recognize revenue to depict the:
- Transfer of promised goods or services to customers
- In the amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The effective dates for the new standard is:
- December 15, 2017 for Public Companies, or
- December 15, 2018 for Nonpublic Companies
The following provides a summary overview of the changes:
5 STEP MODEL FOR RECOGNIZING REVENUE
This Five-Step Framework will be used to determine whether the core principle of Topic 606 has been achieved: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration it expects to be entitled in exchange.
GENERALITIES IMPACTING GOVCON CONTRACTS
KEY STEPS TO FACILITATE TRANSITION
Below are the key transition steps that are suggested to commence as soon as possible.