Revenue Recognition Remodelled
The manufacturing spotlight discusses the new revenue model and highlights key accounting issues and potential challenges for manufacturing entities including entities in chemicals, industrial products and metals sub-sectors.
The goals of the new revenue recognition standard are (1) streamlining, and removing inconsistencies from, revenue recognition requirements; (2) providing "a more robust framework for addressing revenue issues"; (3) making revenue recognition practices more comparable; and (4) increasing the usefulness of disclosures. The new revenue recognition standard states that the core principle for revenue recognition is that an "entity shall recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services."
The new standard indicates that an entity should perform the following five steps in recognising revenue:-
- "Identify the contract(s) with a customer" (step 1);
- "Identify the performance obligations in the contract" (step 2);
- "Determine the transaction price" (step 3);
- "Allocate the transaction price to the performance obligations in the contract" (step 4); and
- "Recognise revenue when (or as) the entity satisfies a performance obligation" (step 5)
As a result of the new standard, entities will need to comprehensively reassess their current revenue accounting and determine whether changes are necessary. Entities are also required to provide significantly expanded disclosures about revenue recognition, including both quantitative and qualitative information about (1) the amount, timing, and uncertainty of revenue (and related cash flows) from contracts with customers; (2) the judgment, and changes in judgment, used in applying the revenue model; and (3) the assets recognised from costs to obtain or fulfil a contract with a customer.