Part one of a 6-part series
In May, 2014, the Financial Accounting Standards Board and the International Accounting Standards Board issued a joint revenue recognition standard related to customer contracts. The new guidelines impact most organizations that deliver goods and/or services on a contract basis, especially when delivered over extended periods of time.
Using the new guidelines for revenue recognition, companies align revenue to the delivery of “performance obligations.” They must account for these obligations—items that are owed to the customer under the terms of the contract—as accrued contract liabilities, and extinguish them by transferring those items to customers and recognizing revenue on the successful transfer.
No longer will companies apply the variety of current practices for recognizing revenue (for example, deferring revenue on early invoicing) or apply current, by-industry US revenue guidance. Application of the guidelines will require some companies to recognize that a contract exists where they previously may not have thought they had one.
The aim of the joint guidelines is to establish a common set of global standards for all companies to recognize and report revenue. But, it’s not really about accounting as much as it’s about capital markets. By uniformly applying these guidelines, it becomes easier for external stakeholders (such as shareholders or financial analysts) to compare revenue performance between organizations. It’s also interesting to note that in a September 2013 speech, SEC Enforcement Director,Andrew Ceresney stated that, “Revenue recognition issues will remain a staple of our financial fraud caseload.”
There isn’t a great deal of time remaining to implement these new guidelines. Public organizations should apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Non-public organizations should apply the new revenue standard to annual reporting periods beginning after December 15, 2018.
These guidelines represent a major shift in revenue recognition for affected companies. For some, it represents the first time that they’ve had to rethink how they “count” revenue, and they may not be sure of what’s involved in this switch from a procedural or systems perspective. Others, especially for those who went through the adoption of IFRS standards in 2007, have experienced this type of transformation before. And many organizations, with Oracle’s help, made that transition smoothly.
With the tight timeline, and some very serious decisions to be made, many will have questions. In the coming weeks, we'll be looking at the issues raised by the new guidelines, such as:
Watch this space for the answers to these questions. If you'd like to dive right in and start exploring Oracle reporting solutions, I invite you to visit our web site.