Simplification Can Be Complex: Rev Rec's 5 Step Process

by Edith Orenstein

Sometimes simplification can be… complex.

The overriding goal of the forthcoming new ‘rev rec’ standard, coming soon to financial statements near you, was to “simplify” revenue recognition by combining the multitude of guidance created over the decades (and across millennia) into one high quality, conceptually sound standard.

But the Financial Accounting Standards Board’s (FASB) new simplified, five-step process may prove to be even more complex for many preparers, auditors, audit committee members and others than the myriad rules that it will replace.

The five-step process anticipated in the new standard, consists of:

  1. Identify the contract with the customer
  2. Identify the separate performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the separate performance obligations in the contract
  5. Recognize revenue when (or as) the entity satisfies a performance obligation
Source:FASB’s Summary of Decisions Reached to Date.

Five steps sounds simple, right? But scrolling through the above link on FASB’s website will show there are many important nuances behind those five steps.

All-in-all, implementing the five points above (and the additional details surrounding them) mixed in with changes from former accounting policies and practices adds at least another layer of intricacy.  Add to the mix the need to address any related internal control and disclosure issues and -- certainly in year one of rev rec transition -- the "simplification" becomes somewhat complex.

That is why the effective date for implementation of the standard has been set – (assuming unchanged from prior FASB deliberations) as:

  • PUBLIC COMPANIES: annual reporting periods beginning after December 15, 2016, including interim reporting periods therein, and
  • NONPUBIC ENTITIES: annual reporting period beginning after December 15, 2017, and interim and annual reporting periods thereafter
However, even with the effective dates shown above, some preparers have voiced concern about whether there will be sufficient time to fully implement the new rev rec standard, which has such broad implications for the business.

Financial Executives International (FEI) will host a full-day conference at the Grand Hyatt Hotel in New York City on June 16, 2014 on the new revenue recognition standard. The conference is entitled Revenue Recognition: Guidance, Changes and Implementation.  See the full list of more than 26 leading speakers and register here.