By Ndwyouell-Oracle on May 26, 2016
I was speaking with Mike Malwitz, Principal Solutions Consultant at Oracle, and I asked him about concerns that he has heard from organizations recently around the new revenue recognition guidelines. His responses were illuminating.
Nigel Youell: “Organizations have been busy figuring out how to recognize and measure revenue under the new guidelines set out by FASB and IASB, but are there other impacts they should be considering?”
Mike Malwitz: “I’m hearing a lot of concerns, from the people with whom I am talking, about the level of contract revenue detail that is to be disclosed. That shouldn’t be a big surprise since investors and other users of financial statements have consistently indicated that revenue disclosure requirements in both the existing U.S. GAAP and IFRS were insufficient for analyzing an entity’s revenue.”
NY: “So what are the intentions for disclosure under the new revenue recognition guidelines?”
MM: “Disclosure requirements under the new revenue guidelines are intended to provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts. Affected organizations are expected to provide information about:
- Revenue recognized from contracts with customers, including the disaggregation of revenue into appropriate categories;
- Contract balances, including the opening and closing balances of receivables, contract assets, and contract liabilities;
- Performance obligations, including when the entity typically satisfies its performance obligations and the transaction price that is allocated to the remaining performance obligations in a contract;
- Significant judgments, and changes in judgments, made in applying the requirements to those contracts. In many cases, organizations will be required to report information that they may not have previously monitored.”
NY: “Is this a major shift in thinking from the current guidelines?”
MM: “Current revenue recognition guidance under both IFRS and US GAAP is limited. The new disclosure requirements reflect the belief that disclosure should be more than just a compliance exercise. Companies need to apply a thought process to disclosure and disclose sufficient information about their judgments and their approach to help users gain an accurate understanding of the numbers in the financial statements. This means qualitative information is just as important as quantitative information for helping the reviewer better understand the nature of the organization’s contract revenue.”
To read part 2 and part 3, click on the respective title.
Part 2: New Revenue Recognition – Disclosure, the Forgotten Implication
Part 3: New Revenue Recognition – Disclosure, the Forgotten Implication
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