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Raffa Resources

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​New Revenue Recognition Rules: Are You Ready?

​By Jewel CorneliusRoyer, Senior Manager and Angela Modrick, Senior II

With the new year fast approaching, most of you should have already determined if and how your revenue streams are impacted by the new revenue recognition rules set out in FASB Revenue from Contracts with Customers (Topic 606).

FASB issued clarifications to the standard in an effort to help you implement these rules and properly recognize revenue. For most nonpublic entities, including nonprofits, the effective date for the updates is the first annual reporting period beginning after December 15, 2018.

Is the Contract Collectible?

Under the new revenue recognition rules the amount of revenue should always reflect what the entity expects to be entitled in the exchange. Yet, some contracts will not meet the standard for collectability from the start, if at all. Nonprofits are still required to continue to assess the contract for collectability, but now can recognize revenue received if:

  • Control of the goods or services has been transferred to the customer;
  • The nonprofit has no further obligation to provide goods or services; and
  • The revenue is nonrefundable.

Principal or Agent?

When examining contracts to identify the nature of performance obligations, new FASB guidance defines when the entity is a principal and when it is an agent, which drives the timing of revenue recognition (ASU 2016-08). This new standard states that:

  • A principal controls the good or service before it is provided to a customer, even if it relies on subcontractors; and
  • An agent arranges for goods or services provided by another party, but does not have control before the transfer to the customer.

Some indications of who has control of a good or service are:

  • Who is primarily responsible to transfer the good or service to the customer?
  • Who has the inventory risk if the customer returns the goods?

Because either a principal or agent may have discretion in determining the price, examining this question alone may not be sufficient to define who has control.

Performance Obligations and Licensing

Examining a contract to identify performance obligations to a customer impacts a nonprofit’s revenue recognition cycle. Determining if the promise to deliver goods or services is distinct is one of those steps. The new guidance (ASU-2016-10) seeks to clarify this undertaking by stating that:

  • You only need to identify what is material to each performance obligation. Immaterial matters within the contract don’t need further examination.
  • You can treat shipping and handling costs as part of the promise to transfer the good rather than additional services.
  • You can decide if transferring goods or services are separate obligations or if these are a combined obligation, with promised goods and/or services as inputs or components.
  • You should use the additional guidance to distinguish contracts that grant licenses as a right to access intellectual property from those that grant a right to use intellectual property.

When a contract includes a license plus goods or services, you will decide when the performance obligation is satisfied in order to recognize revenue at a point in time or over a span of time.

If you earn revenue from royalties, there is further guidance which applies to sales-based and usage-based royalties whenever the main item is intellectual property.

How Many Reporting Periods?

FASB has determined that entities can elect to omit comparative disclosures and present current year financial statements only, unless it made a retrospective accounting adjustment (ASU 2016-12). If a retrospective adjustment was made, you must disclose the effect of the changes for any prior period impacted by such adjustment. Note that:

  • You do not need to restate contracts that begin and end within the same annual reporting period; and
  • For completed contracts with variable revenue, you can use the transaction price on the completion date.

For a deeper dive into these subjects, please refer to ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20.

Please contact Jewel at Jewel.CorneliusRoyer@marcumllp.com or Angela at angela.modrick@marcumllp.com if you have any questions.