It’s Here, Are You Ready? – Transitioning to the New Revenue Recognition Standard

There is some BIG news that was just announced in the world of accounting – game-changing news, as a matter of fact. The long-awaited new FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, was finally issued on May 28, 2014. This new guidance is the result of a collaborative effort by the FASB and the IASB to agree on a global standard based on common principles that can be applied across industries and regions.

In the United States, this new guidance will replace most of the industry-specific GAAP requirements that have become complex and cumbersome to apply in practice. These requirements have developed over a long period of time and consist of myriad disparate requirements for specific transactions and industries including, for example, software, real estate and construction contracts. Prior to the issuance of the new standard, over 200 specialized and/or industry-specific revenue recognition requirements could be found in the accounting literature under U.S. GAAP. Despite this overwhelming volume of requirements, new and emerging transactions sometimes lack explicit guidance. Therefore, differences in reporting may arise as a result of inconsistencies and weaknesses in the literature. All of these disparate revenue recognition requirements have been superseded by the new standard.

Outside the United States, the new revenue recognition requirements will replace the IFRS standards for revenue recognition that provide limited implementation guidance and can be difficult to understand and apply.

For all companies, wherever they are domiciled, the impact of the new standard could be far-reaching and potentially disruptive. While no industry will be totally exempt, the industries that are likely to experience significant changes are software, telecommunications, asset management, airlines, real estate, aerospace, and construction. Changes won’t be limited to these industries, of course, so all companies should consider the need to assess the implications of the new standard and develop implementation plans to address those implications.

Companies with a longer delivery cycle, or those with non-standard and complex contract terms, will be the most affected. These aspects will require greater resources from systems or processes to provide the necessary information to meet the data requirements to account for and describe revenue recognition.

That is why organizations should examine their processes and systems around the order-to-cash cycle data requirements and revenue recognition reporting, and make certain that data flowing from transaction reporting to financial reporting is accurate and complete. Long-term projects, such as system changes and employee education, will be unavoidable for firms that must adapt to the revenue standard convergence, and require early planning to be successful and cost-efficient.

Today we published a comprehensive Flash Report that offers a detailed overview of the new revenue recognition standards and the steps companies should begin undertaking to plan for adoption of these new standards. For those of you immersed in accounting and revenue recognition standards for your organization, I encourage you to read it and educate yourself on its requirements. And good luck. This is not an easy read. The good news is I am sure there will be plenty of conferences out there to consider.


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