Spring 2015 issue of Horizons

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation Performance obligations are satisfied by transferring a promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. For each performance obligation, an entity should determine whether the performance obligation is satisfied over time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time. In addition to the revenue changes, certain cost recognition principles must be implemented. Any incremental costs of obtaining a contract under the new standard should be recognized as an asset if an entity expects to recover those costs. The costs should be subsequently charged to expense over the period during which the goods or services are transferred to the customer. This would include costs such as sales commissions, samples, costs to hire additional personnel and designs or plans, among other expenses. Items such as wasted materials, costs due to inefficiencies and customer-provided materials would be excluded from the expense deferral. IMPORTANT: It may seem fairly easy to apply such a small number of steps to revenue transactions. However, ASU 2014-09 replaces the transaction and industry-specific revenue recognition guidance previously contained within U.S. GAAP with a principle-based approach. As a result, ASU 2014-09 has the potential to affect every entity’s accounting for revenue. While the end result for certain entities may result in no change in the amount and timing of revenue recognition, a completely new process must be utilized to ensure that those entities arrive at the right answer.

Implementation Timeframe For a public entity, ASU 2014-09 is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. For all other entities (nonpublic entities), ASU 2014-09 is effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, but only as of the following: ∙ An annual reporting period beginning after December 15, 2016, including interim periods within that reporting period ∙ An annual reporting period beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017 ∙ An annual reporting period beginning after December 15, 2017, including interim periods within that reporting period During April 2015, FASB voted to propose deferring the effective date of ASU 2014-09 by one year for both public and nonpublic entities. Initially, it may seem as though the effective date schedule provides an ample amount of time in which to implement this new standard, especially if FASB’s proposed deferral is issued in final form. However, based on the pervasiveness of the change

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