New revenue recognition rules will soon be taking effect, and they may have a significant impact that complicates revenue recognition for manufacturers.
A Step Back: The Current Situation of Revenue Recognition
The objective of the new rules is to establish the principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers.
From a manufacturer’s perspective the following are some examples of practices that may be impacted:
- Goods and services on same order or that are interrelated or cannot be used independently (for example required installation services for a piece of machinery)
- Selling goods with volume discounts, rebates, interest-free credit, financing arrangements, discounted settlement terms or entitlements to free goods
- Using Incoterms (International Commercial Terms) that transfer title to goods on receipt
- Selling goods on a sale or return basis
- Providing a warranty with your products
- Changing prices for products during life of an order
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly drafted the standards embodied in FASB Accounting Standards Codification (ASC) 606 and International Financial Reporting Standards (IFRS) 15 respectively. These standards help to clarify the principles for recognizing revenue and can be applied consistently across various transactions, industries, and capital markets. Both are designed to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS.
When Will These Revenue Recognition Rules Become A Requirement?
Under ASC 606, public organizations should apply the new revenue standard to interim reporting periods within annual reporting periods beginning after December 15, 2017. Nonpublic organizations should apply the new revenue standard to interim reporting periods within annual reporting periods beginning after December 15, 2018. IFRS 15 is effective for the first interim period within annual reporting periods beginning on or after January 1, 2018, with early adoption permitted.