Accounting Standards
In 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers. The FASB version of the new standard is known as ASC 606 and the IASB version is known as IFRS15. The new standard aims to:
• Remove inconsistencies and weaknesses in existing revenue requirements.
• Provide a more robust framework for addressing revenue issues.
• Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.
• Provide more useful information to users of financial statements through improved disclosure requirements.
• Simplify the preparation of financial statements by reducing the number of requirements to which an organization must refer.
The revenue recognition standard is largely conceptual in nature and contain several core principles.
• Contracts are segmented into performance obligations and revenue allocated to each obligation.
• Revenue is recognized when control of the goods or services in each performance obligation is transferred to the customer. For example, a manufacturing company is not paid for its goods until the goods are accepted and implementation services are complete.
• Revenue is measured net of customer incentives. For example, the invoice price is higher than the actual price paid because the customer benefits from bulk discounts.
• Estimates and judgments are involved in recognizing and measuring revenue. For example, you know that some goods purchased by a customer are always returned. Therefore, you make a reasonable calculation to judge what portion of the invoice that will be.
• More extensive disclosures are required in financial statements, even if there is no change to the numbers.
The Revenue Accounting department and the Revenue Accountant are responsible for correct accounting for revenue.