FASB ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606)
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 in May 2014, which provided new guidance to accounting professionals on how to recognize revenue from contracts with customers. This update is referred to as FASB ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606), and it was designed to replace the previous revenue recognition standard and simplify the accounting process.
The FASB ASU No. 2014-09 implementation is a critical shift for companies in the way they report revenue and is applicable to all entities that have contracts with customers. The ASU focuses on recognizing revenue when a company transfers goods or services to its customers in exchange for payment.
The new revenue recognition standard identifies five steps that companies need to follow to recognize revenue from customer contracts. These five steps are:
1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when the entity satisfies a performance obligation
The FASB ASU No. 2014-09 requires companies to exercise judgment and make assumptions about the uncertain elements in a contract, including the nature and timing of the goods or services transfer, the contract`s price, and any contingencies or potential uncertainties that may affect the contract.
It is essential for companies to understand the FASB ASU No. 2014-09 changes and review their revenue recognition policies to ensure compliance. The new revenue recognition standard requires companies to disclose more information about their contracts and the judgments they make to recognize revenue.
In summary, the FASB ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) is a significant change in revenue recognition standards for companies. The new standard requires companies to exercise judgment and make assumptions about the uncertain elements in a contract. Companies need to understand the new standard and review their revenue recognition policies to ensure compliance and avoid potential legal issues.