In May 2014, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance that will, upon its effective date, replace almost all pre-existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles (GAAP). Implementation of the new guidance must occur no later than the quarter and year beginning January 1, 2018, for public entities (i.e., public business entities and certain not-for-profit entities and employee benefit plans) with a calendar year end. For all other entities with a calendar year end, implementation must occur no later than the year ending December 31, 2019.
All entities in the technology industry whose financial statements are prepared in accordance with U.S. GAAP will be affected by the new guidance. In our white paper, Changes to revenue recognition in the technology industry, we discuss how addressing the following issues could significantly affect the timing and amount of revenue recognized in an accounting period by an entity in the technology industry when it accounts for its customer contracts under the new guidance:
- Determining whether a contract exists
- Evaluating collectibility and price concessions
- Accounting for contract modifications
- Identifying the units of account, including: (a) identifying the elements or promised goods or services in the contract, (b) determining whether the elements or promised goods or services should be treated as one or more unit(s) of account, (c) additional considerations when accounting for software as a service or hosted software and (d) additional considerations when accounting for options for additional goods or services (e.g., renewal options)
- Accounting for variable consideration
- Accounting for a significant financing component
- Allocating the arrangement consideration or transaction price to the units of account, including: (a) using vendor-specific objective evidence of fair value vs. standalone selling prices, (b) using a residual method and (c) limiting revenue to the amount not contingent upon delivery of any undelivered elements
- Determining whether revenue should be recognized over time or at a point in time
- Accounting for licenses and rights to use intellectual property (IP), including: (a) identifying the performance obligations in a contract that includes a license of IP and (b) determining when a performance obligation that includes a license of IP is satisfied
- Accounting for certain nonrefundable upfront fees
- Accounting for customer acquisition and setup costs
While the degree to which a particular entity’s revenue will be affected depends on its own facts and circumstances, it is important to note that every entity will be significantly affected by the disclosure requirements in the new guidance because they substantially increase the volume of revenue-related information disclosed in the financial statements, particularly for public entities.
While the FASB provided delayed effective dates for the new guidance, it was with the understanding its implementation would be a significant undertaking for many (if not most) entities. With over two years having passed since initial issuance of the new guidance, entities should be well on their way to assessing how it will affect their revenue recognition policies and disclosures and developing an implementation plan. This is particularly true for those entities that plan on electing the full retrospective transition method and those that have multi-year contract terms with their customers.