HOT TOPIC: Revenue Recognition
By: Garrett Shinn, CPA
Revenue recognition is becoming a hotter and hotter topic due to the fact that approximately fifty percent of all financial statement frauds result from revenue recognition issues.
For almost ten years, the Financial Accounting Standards Board (FASB) has listed revenue recognition as the top issue based on the annual survey of the Financial Accounting Standards Advisory Council (FASAC). Revenue is typically the largest single item on the financial statement, so it is imperative to account for it correctly.
On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Additionally, this standard 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 is that an entity should recognize revenue to depict the transfer of 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. To achieve the core principle, an entity should take the following actions:
1) Identify the contract with a customer
2) Identify the performance obligations in the contract
3) Determine the transaction price
4) Allocate the transaction price, and
5) Recognize revenue when or as the entity satisfies a performance obligation.
In other words, revenue is recognized when a company satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). With the impact of this new revenue recognition standard, it will be vital for the tax department to be an active participant in accounting for this change. Some potential impacts on accounting could be income taxes, transfer pricing, foreign tax accounting methods, state income tax apportionment factors, and net-worth or capital-based taxes.
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