Question

Using FASB, research revenue recognition rules and procedures. Discuss a current rule that is either recently changed or under review to change. Compare and contrast it with the current or old rule. Provide examples when considering the impact.

Answer 1

In 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09—Revenue from Contracts with Customers (ASU 2014-09). Effective for calendar year 2019, the new standard will completely replace many previous revenue recognition standards. Coupled with changes brought about by the Tax Cuts and Jobs Act (TCJA), the new revenue recognition rules could significantly change how you record revenue on your books. They could also impact when you recognize income for federal tax purposes, your financial statement disclosures, and more—regardless of your industry.

The following types of transactions are affected by the new standards:
Recognizing revenue on the percentage-of-completion model.
Selling products with a right of return.
Manufacturing products produced to customer specifications.
Bundling products and/or services (such as consulting and maintenance, licensing and maintenance, products and warranties).
Issuing coupons, mail-in rebates, or performance bonuses.
Installing your own products.
Granting franchise and royalty rights.
Selling products as a principal versus an agent (gross versus net considerations).
Selling products with special payment terms (financing component).
Although 2019 may seem far away, it will be here in a few (!!!) short months. Now is the time to take action to ensure your operations will be in compliance with the new revenue recognition rules. Here are a few things you should do to prepare for the changes ahead:

Be ready for a new 5-step revenue recognition model.
The new revenue recognition model consists of the following five steps, each with details that must be carefully considered:

Identify the contract(s) with a customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations in the contract.
Recognize revenue when (or as) the entity satisfies a performance obligation.
If your organization issues comparative financial statements, your 2018 amounts will be affected—and should be calculated before year-end.
Organizations that issue comparative financial statements have two options for implementing ASU 2014-09:

Option #1 – Report 2019 amounts under the new rules and leave 2018 amounts under the old rules. The cumulative effect of the new rules on 2018 amounts will then be adjusted through retained earnings.
Option #2 – Report 2019 amounts under the new rules but restate 2018 amounts to be comparative.
Although option #1 sounds easier, it still requires you to painstakingly calculate the effect on your 2018 amounts and disclose the changes. With this in mind, restating the 2018 balances (i.e., option #2) is not that much more time consuming. In either case, determining the effect on your 2018 amounts should be done now—before the end of the year. This could not only help you learn the new rules prior to 2019 but will also allow you to make any necessary changes to affected policies, procedures, and contractual language.

Examine your accounting method—and determine if a change is needed.
To reduce taxpayers’ cost of compliance and administrative burden associated with the new revenue recognition standards, the IRS released updated procedural guidance (Rev. Proc. 2018-29) for implementing tax accounting method changes in May 2018. Generally speaking, the IRS now allows an “automatic consent method” for accounting method changes filed for the taxable year in which the taxpayer adopts the new revenue recognition standards. If your organization has already adopted the new standards, you may want to examine whether any tax accounting method changes are necessary so you can file in the proper tax year. Keep in mind: filing an accounting method change in a different year could trigger a non-automatic consent request—and a $9,500 filing fee.

Explore new ways of computing your book-tax differences.
Because the new revenue recognition rules could accelerate the recognition of revenue, they could also accelerate the recognition of income for federal tax purposes. Depending on how the new rules affect your organization, the differences between your financial (i.e., book) and tax accounting may become more complicated to determine. To resolve this issue, you may want to consider exploring ways to track your book-tax differences as soon as possible.

Pay attention to changes related to the “all-events” test.
In light of the TCJA’s amendments to Section 451 of the tax code, the all-events test with respect to any item of gross income (or a portion of the item) cannot be met later than when such income is recognized as revenue. This applies to accrual-method taxpayers that have an applicable financial statement. The amendments also provide these taxpayers with an elective method of accounting to defer income for one year on advance payments made during the taxable year.

Revenue is one of the most important measures used by investors in assessing a company’s performance and prospects. However, previous revenue recognition guidance differs in Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)—and many believe both standards were in need of improvement.

On May 28, 2014, the FASB and the International Accounting Standards Board (IASB) issued (press release) converged guidance on recognizing revenue in contracts with customers. The new guidance is a major achievement in the Boards’ joint efforts to improve this important area of financial reporting.

Presently, GAAP has complex, detailed, and disparate revenue recognition requirements for specific transactions and industries including, for example, software and real estate. As a result, different industries use different accounting for economically similar transactions.

The objective of the new guidance is to establish principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The new guidance:
Removes inconsistencies and weaknesses in existing revenue requirements
Provides a more robust framework for addressing revenue issues
Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
Provides more useful information to users of financial statements through improved disclosure requirements, and
Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer.