By Steve Dalton on Oct 01, 2014
I was talking to Seamus Moran again the other day.
He was saying he had some sympathy for the existing US GAAP folk who had so much to unlearn in respect of the new revenue recognition standard.
He told me that with deferred revenue, you took a sales invoice, and predicted when you’d put that into revenue in the P&L. You’d add carve-ins and deduct carve-outs and deduct releases to the P&L.
But the new standard takes all of that away. Instead of accounting for deferred revenue, sales invoices you had to postpone on the sale side, you now have to account for performance obligations, what you owe customers.
It is a big change. It is not sales invoice-based. The FASB & IASB spelled out the four steps to get a performance obligation value, and they did it so you would get to a performance obligation value, not a delta to a sales invoice. He said he can recite them: Step 1, ID the contract. Step 2, ID your promises (assign ID numbers), explicit and implicit, to customers as performance obligations. Step 3, value the transaction in total, what are you going to get in total. Step 4, using standalone selling prices (SSP) or estimated selling prices (ESP), allocate the total to the performance obligations.
At this stage, you now have valued your performance obligations. No need to go looking at invoices, carvings, or releases. Sure, you may not have all the necessary data, or the quantities aren’t known yet, etc., but this is data you are supposed to book keep, at which you should value revenue, contract liabilities, and contract assets. Quantity times performance obligation times SSP or ESP.
He says that, actually, embracing the performance obligation idea makes this whole standard much more easy to digest.
Stay tuned for the next in our series of blog posts about the new revenue recognition standard.