On July 9, 2015, the Financial Accounting Standards Board (FASB) approved its April 2015 proposal to defer the effective date of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, for all entities for one year. Entities will, however, be allowed to apply the new standard as of the original effective dates set out in the standard. Because revenue is one of the most important measures investors use when assessing a company’s performance and prospects, the proper implementation of the standard is high on the FASB’s list of priorities.
Genesis of the new standard
The new standard — considered one of the most significant standards the FASB has issued in recent history — has been in the works for more than a decade and was published in May 2014. It standardizes when and how companies must recognize revenue and requires more comprehensive disclosures related to revenue. The standard was largely converged with International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers. The converged standards are expected to have a substantial impact on the financial statements of many companies, especially those in the software, media, and telecommunications industries.
ASU 2014-09 replaces about 180 pieces of industry- and transaction-specific rules under US Generally Accepted Accounting Principles (GAAP). The abundance of rules led to different accounting for economically similar transactions. The new rules provide a single principles-based model for recognizing revenue from customer contracts worldwide.
The GAAP guidance, along with the corresponding IFRS rule, is based on the core principle that a company should recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the payment the company expects to be entitled to in exchange for the goods or services.
The American Institute of Certified Public Accountants (AICPA) established task forces to help companies interpret and apply the new standards in specific industries:
- Aerospace and defense
- Asset management
- Construction contractors
- Depository institutions
- Oil and gas
- Power and utility
Each task force will develop an industry-specific accounting guide on revenue recognition, with illustrative examples of how companies in the industry should apply the new guidance.
The original effective date for the ASU for calendar-year public companies was Jan. 1, 2017, and early implementation wasn’t allowed. The ASU gave private companies an extra year to adopt the new rules, but they could opt to adopt them at the same time as public companies.
Both before and after the ASU was released, the FASB received unsolicited comments and letters from stakeholders asking it to defer the effective date. To determine whether a deferral was warranted, FASB staff and board members met with financial statement preparers (including public and private companies and not-for-profit organizations) from a wide range of industries, as well as representatives from audit firms and financial statement users.
A majority of stakeholders supported a deferral of the effective date. Among other concerns, they cited the lack of available information technology solutions to facilitate implementation; without such solutions, many companies would need to manually process transactions to adhere to the new rules by the original effective date, increasing their cost of implementation. And, they said, internal controls over the new systems and processes resulting from the ASU can’t be fully designed and implemented until the IT solutions are available and proposed amendments to certain aspects of the new standard have been finalized.
Moreover, the ASU was issued about nine months later than the FASB had anticipated when selecting the effective date. The implementation period, therefore, was shorter than originally expected.
In late April, the FASB decided to defer the effective date, but it sought comments on the appropriate length of the deferral. The FASB accepted comments until late May and, on July 9, voted to approve a one-year delay.
Under the extension, public companies, certain employee benefit plans and some not-for-profits have until the fiscal years that start after Dec. 15, 2017, to apply the new revenue recognition standard. They’ll also apply the standard to the quarterly reports and other interim-period reports issued for that year.
Private companies may adopt the ASU for annual financial statements for fiscal years starting after Dec. 15, 2018. These private companies can apply the standard to quarterly reports and other interim-period reports for fiscal years that start after Dec. 15, 2019.
Companies also have the option of adopting the standard on the original effective date.
Additional clarification amendments pending
As previously mentioned, the FASB is considering some additional amendments to clarify various other provisions in ASU 2014-09. For example, it released a proposed update in May addressing issues related to identifying performance obligations and licensing. Any changes would affect every company that enters into contracts with customers to transfer goods or services.
For more information on revenue recognition, or to learn how Baker Tilly specialists can help, contact our team.
Note: The July 9, 2015 FASB vote became effective August 12, 2015.