Revenue Recognition Vocabulary

Making sense of the current and upcoming changes requires understanding both the role of the primary organizations involved, and the lingo (as well as current vocabulary with some new twists).

In our last post, we gave you an overview of revenue recognition. In the upcoming weeks, we plan to delve into concrete detail of how changes in reporting revenue recognition impact specific industries.

In today’s post, we review with you, the governing bodies involved in the revenue recognition changes and some of the key phrases / words that you will see referenced often.

The organizations involved in the new standards:

Financial Accounting Standards Board (FASB) – The FASB is a non-profit standard accounting setting board that is responsible for the United States accounting requirements and maintaining the General Accepted Accounting Principles (GAAP – see below for more detail). FASB collaborated with the International Accounting Standards Board (IASB – described below) to develop the new standards for revenue recognition.

International Accounting Standards Board (IASB) – The IASB is an international standard setting board that focuses on all other countries outside the United States. They are responsible for the International Financial Reporting Standards (IFRS – described below), with the goal of bringing transparency, accountability, and efficiency to the financial markets world-wide.

American Institute of Certified Public Accountants (AICPA) – This is an organization of U.S. CPAs. The AICPA believes that setting global accounting standards can be a benefit to U.S. markets and public companies.

The Accounting Standards that have been modified:

Generally Accepted Accounting Principles (GAAP) – These are the standards for how US companies should prepare and disclose their financial statements outside of the organization. While US companies may issue non-GAAP results, they must be explicitly identified as non-compliant. However, since 2007, if a company is compliant with IFRS, it is not required that a company restate their results in the GAAP in the US if they are publicly traded.

International Financial Reporting Standards (IFRS) – These are the global standards for non-US companies, and how they are required to prepare and disclose their financial statements. In the past, there have been issues with respect to revenue recognition, as there was not a lot of guidance for revenue in these standards, and it left many things open to interpretation. They became difficult to apply, and the accounting conclusions don’t necessarily match up with the economics of the transaction.

General Revenue Recognition terms to become familiar with respect to the new standards:

Revenue Recognition –A firm understanding of the term revenue recognition is imperative. In the simplest terms, it is the accounting principle under the various standards that determines the specific condition under which the work that an organization has performed on behalf of another organization is recorded as their earnings. The new standards will improve the comparability of revenue recognition practices across industries and capital markets. Required corporate changes to reporting standards have already begun, with early adoption available now. All public companies are required to recognize revenue with the new requirements by December, 2017.

Revenue – Revenue is a company’s income. With the changes in revenue recognition, it will be recognized on a contract basis.

Contracts – The new revenue recognition system is a single, contract based model. The basis of the new system is that companies recognize their revenue as they fulfill their obligations (the contract conditions) even if there is only an informal agreement.

Performance Obligations – The second step in the new revenue recognition model is to identify performance obligations. A performance obligation is the promise to provide a good or service, with an associated amount for completing the process.

Financial Statement – A financial statement reports on a company’s assets, liabilities and owners’ equity at any given point in time. New recognition standards will provide more useful information to users of these statements through improved disclosure requirements.

The new revenue recognition process is useful for accountants, businesses and organizations, as well as capital markets.

What’s next:

In our next post, we will analyze the new required process(es) for recognizing revenue.

These significant changes in financial reporting can bring confusion on how to implement them to any organization. We are here to help you make sense of how to bring your accounting into compliance for the upcoming transition in revenue recognition standards. If you or your organization need assistance or implementation guidance, please contact us today!

Resources:

Introduction to the New Revenue Recognition Standards: https://www.youtube.com/watch?v=I7FWLGGOEdk

AICPA IFRS Resources: http://www.ifrs.com

Convergence of International and US Accounting Standards: http://www.aicpa.org/Advocacy/Issues/Pages/US-IntlAcctPrinConvergenceAndIFRS.asp

Further Explanation of GAAP vs IFRS: http://www.investopedia.com/terms/g/gaap.asp