According to the Financial Accounting Standards Board’s (FASB’s) Revenue from Contracts with Customers (referred to hereafter as “the standard”), there are five steps to revenue recognition. In this article, we discuss the first step of recognizing revenue: identifying contracts.
Let’s start by looking at what has happened to date.
The Puzzling Standard
Because the standard is principles-based, the FASB issued broad, comprehensive requirements with a number of supporting implementation examples. Since the requirements became public, users and practitioners have raised a number of specific questions. In acting as a gatekeeper for these inquiries, the TRG has publicly addressed some issues while recommending that the FASB take further action on others.
Identifying Contracts and Collectability
The first checkpoint of the revenue recognition maze requires companies to identify contracts with the customer. Under the standard, to be a contract for accounting purposes, it must be probable that the seller will collect the contract price. The collectability determination is usually based on the buyer’s ability and intent to pay. If collection is not deemed probable, then revenue cannot be recognized. Therefore, any received or recorded consideration is reported as a liability until the threshold is met. Since the TRG has received numerous questions about implementing this requirement, it is likely that additional guidance is forthcoming.
Collectability could affect a variety of industries to different degrees. One industry that could experience unexpected collectability consequences is the not-for-profit industry. Because the standard applies to all types of exchange transactions, nonprofit organizations may need to reassess some transactions on which they depend – such as member dues, service fees, and event ticket sales – for collectability at the time of billing. The results of that assessment could force some nonprofit entities to defer their exchange-based revenue.
Let CRI Help You Solve the Maze
It may be tempting to turn around and exit the revenue recognition maze, but CRI is ready to guide you to a solution. Contact us if you need assistance implementing the standard at your business. For more related news and resources, visit our Revenue Recognition trends section.