The new Revenue Recognition standard establishes consistent principles (regardless of industry or geography) to report useful information about the nature, amount, timing, and uncertainty of revenue from contracts with customers. Public companies were required to apply the standard starting in 2018, private companies start adopting the standards in January 2019.
These are the five steps that allow the recognition of revenue under that core principle:
- Identify the contract with the customer
- Identify the contractual performance obligations
- Determine the amount of transition consideration/price for the transaction
- Allocate the transaction consideration/price to the contractual performance obligations
- Recognize revenue when or as the performing party satisfies performance obligations
The concept of the revenue recognition principle is a combination of accrual accounting and the matching principle, stipulating that revenues are recognized when realized and earned, not necessarily when received. Realizable means that goods and/or services have been received, but payment for the goods and/or services is expected later. Earned revenue accounts for goods and/or services that have been provided or performed, respectively. In addition, the revenue generating activity must be fully or primarily complete to include its revenue during the respective accounting period, and there must be a reasonable level of certainty that earned revenue will be received. Lastly, according to the matching principle, the revenue and its associated costs must be reported in the same accounting period.
Clear as mud; if you need assistance please give us a call. This is unnecessary for those small businesses that are on the cash basis of reporting.