Latest ASU on Revenue Recognition

Revenue recognition is one of the most challenging issues in accounting. Consequently, related standards are attentively reviewed by the standard setting bodies as well as they are continuously updated. Changes in the revenue recognition principles in US GAAP (Generally Accepted Accounting Principles) were encouraged by the conversion project initiated by the FASB (Financial Accounting Standards Board) and the IASB (International Accounting Standards Board) with the goal to mingle the norms of American and international financial reporting. This paper aims at discussing the novelties introduced by the FASB and analyzing all the aspects, factors and influences resulting from it.

To start with, a new revenue recognition standard under US GAAP was issued in 2014 while the IASB established the IFRS 15 (International Financial Reporting Standards) on revenue recognition in 2015. What is more, the US GAAP standard was amended by several ASUs (accounting standard updates) and the most recent of them concentrating on the revenue recognition appeared in March 2016. To detail, it comprised such significant topic as recognition of revenue by the principals and agents while at the same time providing the necessary goods and services to the customers.

Markedly, the latest ASU 2016-08 takes its effect along with the innovative revenue recognition standard in December 2017. Specifically, it clarifies the relationships between a principle and an agent while recognizing the revenue figure on the financial statements. To explain, the described standard requires the principal to analyze what item is provided to the final customer – a good, a service or a right to obtain a good or service. Besides, it contains a definition of the principal as a party that has control over the provided item and determines an agent as a side arranging the goods or services to be contributed to the principal (FASB, 2016). Moreover, the ASU refined the definition of control and added a requirement to assess the control individually for each provided item (and not over the whole contract) or right for it in ASC 606-10-55-36A. Generally, the ASU changed five paragraphs (from ASC 606-10-55-36 to ASC 606-10-55-40) and enhanced the standard with a number of practical examples related to the issue of principal-agent relationships.

The paramount reason for updating the revenue recognition standard in the latest ASU is that the FASB has an objective to eliminate any possible differences and inconsistencies in presenting the financial statements by the various reporting entities. Hence, the Board decided to facilitate the issue of revenue recognition relying on the principals and agents. Over and above, the added changes managed to reduce the costs of adopting the standard through the transparency and the diminished complexity of the rules.

In fact, the ASU 2016-08 has not altered much compared to the old rules. Actually, it rather supplemented the revenue recognition process with accuracy as well as specified the control over the goods and services. Furthermore, it defined the principals and agents in the complex contracts which allowed various entities to differentiate their revenue recognition bases regarding the consideration and fees respectively. Notably, the major divergence between the current revenue recognition standard (as issued in 2014) and its previous version is the attached five paragraphs with the clarifications of principal-agent relationships and a number of new examples entailed in the revised standard.

It goes without saying that the new update has impact on virtually all of the industries and entities. Several exclusions include non-profit organizations and government entities that do not obtain revenue or other income from the operations like sale of the goods and services to the customers. Certainly, it can be expected that the highest impact will be exposed to the companies frequently hiring subcontractors, for instance, construction entities, consultants, etc.

Among the financial statements a considerable effect of the ASU 2016-08 might experience only the income statement. This report contains the revenue line that can influence those entities having contracts with the agents involved in selling a multitude of goods or services to their customers. A balance sheet, in its turn, contains the resulting item – the retained earnings. Nevertheless, both this report and the statement of cash flows are not directly affected by the revenue standard as well as by the recent update.

Important to realize is that the latest ASU has the highest importance for accountants, consultants, and auditors. Accountants should be aware of every change in the main standards and, especially, they must pay a high attention to the revenue recognition issue. Consultants and auditors, accordingly, should be able to check and advise on the issue. So, they have to inform themselves about the updates in the standards likewise. Additionally, other parties such as managers and investors must know the ASU in order to understand the financial statements provided to them by the accountants and possible impact of the amended paragraphs on the revenue recognition standard.

Since the ASU was introduced only a few weeks ago, there is not much response to it in the articles as well as within the accounting society. Namely, large auditing and accounting firms have recently got acquainted with this update and stated their support of the changes issued by the FASB. For instance, Ernst and Young precisely indicated that the ASU 2016-08 has clarified the issue of recognizing the revenue by the principals and agents as well as has provided a better realization of the supervision over the goods and services (Ernst and Young, 2016).

To conclude, the FASB makes a number of enormous efforts in order to cut costs and improve consistency in application of the issued accounting standards. Undoubtedly, the latest ASU once again confirms this. It provides much more clarity in understanding the revenue recognition process for the principals and agents and significantly eliminates the possible differences in application of the new revenue standard. Overall, it is expected that all the parties and industries will benefit from the new ASU due to the enhanced transparency and clarity of the revenue recognition issue.

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