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Perspectives

New revenue recognition standard updates

A roadmap to applying ASC 606

The new revenue recognition standard outlines a single, comprehensive model for accounting for revenue from customer contracts. This new model supersedes most legacy guidance—including industry-specific guidance—and fundamentally changes how entities are required to think about revenue recognition.

Demystifying the new revenue recognition standard

Two key questions for recognizing revenue
The new model’s core principle for revenue recognition is 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.” This principle was established by both the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) and is the underpinning of the entire revenue framework. In particular, it identifies and answers the two most fundamental questions related to revenue.

When may an entity recognize revenue?
The entity may recognize revenue when it satisfies its obligations under a contract by transferring goods or services to its customer. (That is, when the entity performs, it should recognize revenue.)

How much revenue may an entity recognize?
The entity may recognize the amount to which it expects to be entitled under the contract. (Estimates may be required because this is an “expected” amount.)

The FASB and IASB intentionally chose the wording “be entitled”—rather than “receive” or “collect”—in order to distinguish collectibility risk from other uncertainties that may occur under the contract.

Acknowledging implementation challenges

During Deloitte’s “Looking Ahead—Annual Accounting and Financial Reporting Symposium,” which took place in December 2017, we polled the audience about their biggest challenge regarding implementing the new revenue standard. Of the 250 attendees who provided a response, 42 percent stated that implementing disclosure requirements is their biggest challenge, followed by 27 percent who stated that balancing principles-based judgment is their biggest challenge.

Source: Poll of attendees of Deloitte’s Looking Ahead—Annual Accounting and Financial Reporting Symposium, December 2017. Two-hundred and fifty attendees responded.
 

The new revenue recognition standard introduces a significant amount of judgment, and companies need to recognize that applying judgment under the new standard does not mean any and all judgments are acceptable. There are instances when differing judgments under the new revenue standard might be acceptable, but in other instances, similar facts should result in similar judgments.

Differentiating between when it is OK to have differing judgments and when it is not OK can be a significant challenge for companies as they implement the new revenue standard. By recognizing the challenge—and taking deliberate steps to address it—they can evaluate judgments and enable the many benefits of a principles-based revenue recognition approach to shine through. Learn more about applying judgment in a principles-based model for revenue recognition.

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Five steps to recognizing revenue

A framework for revenue recognition
In order to achieve the core principle and determine when to recognize revenue—and how much revenue to recognize—the FASB and IASB established a five-step framework.

The five steps provide entities with a model to identify the contract to be evaluated under the new revenue standard, evaluate the performance obligations (or units of account to which the recognition principles apply), and estimate the amount of consideration to be recognized as revenue for each performance obligation.


A five-step model for recognizing revenue

The new revenue standard affects other accounting topics as well, including, but not limited to, contract modifications, licensing, contract costs, and presentation. Also, the new revenue standard creates additional quantitative and qualitative disclosure requirements.

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Applying the new revenue recognition standard

Putting the new model into practice
The move from legacy US GAAP’s risk- and reward-based revenue recognition model to the new revenue standard’s control-based model is a fundamental change in how entities are required to think about revenue recognition.

Also, the new revenue standard eliminates many of the revenue recognition rules prescribed under legacy US GAAP, replacing them with a principles-based framework outlined in the five-step model.

In some cases, applying the five-step model and recognizing revenue under the new standard will be straightforward. In other cases, however, applying the new guidance will require significant judgment, increasing the complexity of compliance.

The 2017 edition of Deloitte’s A Roadmap to Applying the New Revenue Recognition Standard highlights some of the more challenging aspects of the new revenue standard and how it might require a different way of thinking about revenue recognition. Click the tiles below for several examples.

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