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US Accountants Consider New Revenue Standards

by Mike Godfrey,, Washington

06 November 2015

The Financial Reporting Executive Committee (FREC) of the American Institute of Certified Public Accountants (AICPA) has released working drafts on issues relating to the new accounting standard on the recognition of revenue from contracts with customers.

The AICPA notes that the Financial Accounting Standards Board's (FASB's) new accounting standard will eliminate the transaction- and industry-specific revenue recognition guidance under current US Generally Accepted Accounting Principles, and replace it with a principle-based approach for determining revenue recognition.

This standard, it points out, "has the potential to affect every entity's day-to-day accounting and, possibly, the way business is executed through contracts with customers."

The core principle of the new standard is for companies to recognize revenue in their accounts only when goods and services are transferred to or performed for their customers, and in amounts that reflect the payment to which the company is then entitled in exchange for those goods or services. This should be achieved by: identifying the contract(s) with a customer; identifying the performance obligations in the contract; determining the transaction price; allocating the transaction price to the performance obligations in the contract; and recognizing revenue when (or as) the entity satisfies each performance obligation.

The FREC has released for comment working drafts of revenue recognition implementation issues it has identified for the aerospace and defense industry and the investment asset management industry. Interested parties are to submit their informal feedback on implementation issues by December 31, 2015.

The aerospace and defense industry implementation issues include the application of the new guidance for costs typically incurred in aerospace and defense contracts, including pre-contract costs and learning or start-up costs; amortization and impairment; and estimates of variable consideration (incentive fees, award fees, economic price adjustments).

The working draft also discusses how the requirement for regulatory approvals impacts the determination of whether an executed/signed contract meets the criteria for existence of a contract.

Implementation issues for the investment asset management industry are said to include considerations of when a contract exists between an asset manager and a customer, and identifying who the customer is (the investor or the fund). They also include the issue of when to recognize revenue from management fees under the new standard, and how incentive or performance revenue, excluding carried interest, should be included.

The FSAB and the International Accounting Standards Board, responsible for International Financial Reporting Standards, have decided to defer the effective date of the new standard until 2018. Early adoption by companies is allowed, but not before the original effective date (annual periods beginning after December 2016).

Final revenue recognition implementation issues will be included in a new Revenue Recognition Guide that the AICPA is developing.

TAGS: generally accepted accounting principles (GAAP) | investment | business | accounting | aviation | investment funds | international financial reporting standards (IFRS) | United States | financial reporting | standards | business investment

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