Question

What are the consequences associated with the new revenue recognition standard?

Answer 1

Answer is -

In 2014, the Federal Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued new standards for recognizing revenue from contracts with customers known as ASC 606. The result of a years-long effort, the ASC 606 guidelines will be instituted in 2018 for public companies and 2019 for private firms.

The goal of ASC 606 was to simplify and harmonize revenue recognition practices. Currently, requirements for reporting revenue—a critical metric for evaluating a company’s financial performance—vary across different industries, jurisdictions and markets. These discrepancies create incongruent accounting results for economically similar transactions, rendering macro-level comparisons nearly impossible.

The new standards are based on one overarching principle: Companies must recognize revenue when goods and services are transferred to the customer, in an amount that is proportionate to what has been delivered at that point. Now, they have to follow five step model, which is as follows-

THE FIVE-STEP MODEL

A five-step model summarizes the process for recognizing revenue from contracts with customers:

1. Identify the contract with the customer

2. Identify the separate performance obligations

3. Determine transaction price

4. Allocate transaction price

5. Recognize revenue when (or as) a performance obligation is satisfied