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).
All entities in the technology industry whose financial statements are prepared in accordance with U.S. GAAP will be affected by the new guidance. In our white paper, Changes to revenue recognition in the technology industry, we discuss how addressing the following issues could significantly affect the timing and amount of revenue recognized in an accounting period by an entity in the technology industry when it accounts for its customer contracts under the new guidance:
- Determining whether a contract exists
- Evaluating collectibility and price concessions
- Accounting for contract modifications
- Identifying the units of account, including: (a) identifying the elements or promised goods or services in the contract, (b) determining whether the elements or promised goods or services should be treated as one or more unit(s) of account, (c) additional considerations when accounting for software as a service or hosted software and (d) additional considerations when accounting for options for additional goods or services (e.g., renewal options)
- Accounting for variable consideration
- Accounting for a significant financing component
- Allocating the arrangement consideration or transaction price to the units of account, including: (a) using vendor-specific objective evidence of fair value vs. standalone selling prices, (b) using a residual method and (c) limiting revenue to the amount not contingent upon delivery of any undelivered elements
- Determining whether revenue should be recognized over time or at a point in time
- Accounting for licenses and rights to use intellectual property (IP), including: (a) identifying the performance obligations in a contract that includes a license of IP and (b) determining when a performance obligation that includes a license of IP is satisfied
- Accounting for certain nonrefundable upfront fees
- Accounting for customer acquisition and setup costs
While the degree to which a particular entity’s revenue will be affected depends on its own facts and circumstances, it is important to note that every entity 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.
While the effective dates for the new guidance are staggered, they are now upon us. With limited exceptions, the new guidance was effective as of January 1, 2018 for public entities with calendar year ends. For all nonpublic entities with calendar year ends, the new guidance is effective in the year ending December 31, 2019. Time is of the essence for these entities given that implementation of the new guidance could represent a significant undertaking in many cases. Our white paper can be a valuable tool in the implementation process to help understand the application of ASC 606 to entities in the technology industry.
For a comprehensive discussion and numerous examples of applying the new guidance, refer to our publication, A guide to revenue recognition.