Converged revenue recognition standard issued

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have jointly a converged standard on the recognition of revenue from contracts with customers, which is expected to improve the financial reporting of revenue and improve comparability of the top line in financial statements globally

While revenue is of vital importance to users of financial statements in that it is used to assess a company’s financial performance and prospects, the previous requirements of both IFRS and US GAAP were different and so often resulted in different accounting for transactions that were economically similar.

Financial reporting was further complicating since revenue recognition requirements of IFRS lacked sufficient detail while the accounting requirements of US GAAP were considered to be overly prescriptive and conflicting in certain areas.

The new fully converged requirements for the recognition of revenue in both IFRS and US GAAP provide enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and US GAAP.

The core principle of the new standard is for companies to recognise revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods of services.

The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements.

The revenue standard will be included in IFRS as IFRS 15, Revenue from Contracts with Customers, and replaces IAS 18 Revenue, IAS 11 Construction Contracts, and related Interpretations.

Companies using IFRS will be required to apply the revenue standard for reporting periods beginning on or after 1 January 2017 (early application is permitted).

Public companies using US GAAP will be required to apply it for annual reporting periods beginning after December 15, 2016, including interim reporting periods therein. Additionally, US non-public companies and organisations are to apply the revenue standard for annual reporting periods beginning after December 15, 2017, and interim and annual reporting periods thereafter.

In order to aid transition to the new standard, the boards have also established a joint transition resource group, the details of which will be announced shortly.

IASB chairman Hans Hoogervorst said: ‘The successful conclusion of this project is a major achievement for both boards. Together, we have improved the revenue requirements of both IFRS and US GAAP, while managing to achieve a fully converged standard. Our attention now turns to ensuring a successful transition to these new requirements.’

Chairman of the FASB, Russell Golden, said: ‘The revenue recognition standard represents a milestone in our efforts to improve and converge one of the most important areas of financial reporting. It will eliminate a major source of inconsistency in GAAP, which currently consists of numerous disparate, industry-specific pieces of revenue recognition guidance. The issuance of this standard is a major first step, but it is not the end of the process. Through the transition resource group and a robust implementation period, the FASB and the IASB will work to ensure that reporting organizations are able to make a smooth transition to the new requirements by 2017.’

To access revenue recognition case studies produced by the IASB and FASB, go here: Case studies_Revenue recognition.pdf

 

Penny Sukhraj |Content editor, Accountancy - (up to 2016)

Penny Sukhraj, former content editor and writer for Accountancy and Accountancy Live, responsible for commissioning and editing news...

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