The Financial Accounting Standards Board (FASB) has been extremely active in recent months. They have finalized and released the long anticipated updates to the revenue recognition and lease accounting standards.
FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, in May 2014. The standard eliminates the transaction- and industry-specific revenue recognition guidance that is utilized under current U.S. GAAP. Instead, the new standard uses a principle based approach for determining revenue recognition.
The standard will require you to:
- Identify the contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
This standard will likely affect day-to-day accounting and may change way business is executed through contracts with customers.
FASB released ASU 2016-02, Leases (Topic 842), in February 2016. The new standard will require lessees to recognize assets and liabilities arising from all leases, except for leases with a lease term of 12 months or less. This standard will likely affect most companies and will result in the balance sheet looking significantly different.
When are the new changes effective?
The revenue recognition standards are effective for annual reporting periods beginning on or after December 15, 2017.
The new lease accounting standard is effective for annual reporting periods beginning on or after December 15, 2019.
What are the next steps?
Although the new standards are not effective for a few years, it’s important that you start thinking about how the will affect your company.
- Will you have to review your contracts with customers to identify your company’s performance obligations?
- Will you have to change the way that your IT system or software applications recognizes revenue?
- How will the new revenue recognition standards impact your taxes?
- How will the new lease accounting standards impact your current leases?
- How will the recognition of new assets and liabilities from leases impact your contractual agreements or debt covenants?
Contact your trusted advisor at Apple Growth Partners for more information on how these new standards will affect your company.