United States

Changes to revenue recognition for business and professional services

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In May 2014, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance that will, upon its effective date, replace almost all pre-existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles (GAAP). Implementation of the new guidance must occur no later than the quarter and year beginning January 1, 2018, for public entities (i.e., public business entities and certain not-for-profit entities and employee benefit plans) with a calendar year end. For all other entities with a calendar year end, implementation must occur no later than the year ending December 31, 2019.

All service providers whose financial statements are prepared in accordance with U.S. GAAP will be affected by the new guidance. In our summary, Changes to revenue recognition for business and professional services, we discuss the following five areas of the new guidance and how a service provider’s revenue recognition may change upon implementing that guidance: 

  • Identifying the units of account
  • Accounting for incentive payments
  • Determining whether revenue should be recognized over time or at a point in time
  • Recognizing revenue as a principal or an agent
  • Accounting for contract modifications

While the degree to which a particular service provider’s revenue will be affected depends on its own facts and circumstances, it is important to note that every service provider will be significantly affected by the disclosure requirements in the new guidance because they substantially increase the volume of revenue-related information disclosed in the financial statements, particularly for public entities. 

While the FASB provided delayed effective dates for the new guidance, it was with the understanding its implementation would be a significant undertaking for many (if not most) entities. With over two years having passed since initial issuance of the new guidance, service providers should be well on their way to assessing how it will affect their revenue recognition policies and disclosures and developing an implementation plan. This is particularly true for those service providers that plan on electing the full retrospective transition method and those that have multi-year contract terms with their customers.

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