Key aspects of the converged accounting standards

  • New standard takes principle-based approach to revenue recognition issue
    • A firm should recognize revenue when it has transferred a good or service to a customer
  • Five step-process for recognizing revenue
    • (1) Identify Contract with a customer 
      • Contract: agreement with specific rights and obligations
    • (2) Identify performance obligation in the contract 
      • Promise to deliver a distinct good or service
        • Customer can benefit from good or service 
        • Transfer good and service that is separately from any other promises 
    • (3) Determine the transaction price
      • Amount a firm expected to receive from a customer in exchange for transferring a good or service
    • (4) (Combine) Allocate transaction price to the performance obligation in the contract
    • (5) Recognize revenue when entity satisfies a performance obligation

Required disclosure under converged standards: 

  • Contract with customers
  • Assets and liabilities related to contracts, including balance and changes
  • Outstanding performance obligation and transaction price 
  • Management judgment used to determine the amount and timing of revenue recognition 

Notes: Revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received.