The FASB and IASB believe the new standard will improve the consistency of requirements, comparability of revenue recognition practices, and usefulness of disclosures. The new model’s core principle for revenue recognition is to provide a comprehensive framework to account for revenue from contracts with customers.
Revenue is one of the most important measures used by investors in assessing a company’s performance and prospects. However, previous revenue recognition guidance differs in Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS)—and many believe both standards were in need of improvement.
On May 28, 2014, the FASB and IASB issued their final standard on recognizing revenue from customer contracts. The standard, issued as ASU 2014-09 by the FASB and as IFRS 15 by the IASB, outlines a single comprehensive model for entities to use in accounting for revenue from contracts with customers.
The new guidance on revenue recognition affects any reporting organization that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts).
On May 28, 2014, the FASB and the International Accounting Standards Board (IASB) issued (press release) converged guidance on recognizing revenue in contracts with customers. The new guidance is a major achievement in the Boards’ joint efforts to improve this important area of financial reporting.
The new model’s core principle for revenue recognition is to provide a comprehensive framework to account for revenue from contracts with customers. This principle was established by both the FASB and IASB and is the underpinning of the entire revenue framework. In particular, it identifies and answers two fundamental questions related to revenue.