Hello, my name's Jeffrey Werner.
I'm an expert on revenue recognition, and we're talking today about the new Revenue
Standard that will become US GAAP and worldwide IFRS guidance for revenue recognition.
The new standard has been jointly issued by the Financial Accounting Standards Board (FASB)
for the US and the International Accounting Standards Board (IASB) for worldwide companies
that have revenue.
The question often comes up whether this new standard only applies if the US adopts IFRS,
and the answer to that is a clear "no."
IFRS is promulgated by the International Accounting Standards Board which is one of the two bodies
- along with the FASB - that is issuing this joint standard.
This new standard is issued jointly by FASB, which does US GAAP, and the IASB, which does
IFRS GAAP.
So, when it becomes effective in 2017, it's effective both for US companies that follow
US GAAP and companies that follow IFRS.
It's not a question of if the US adopts IFRS, it's a question of when the new standard becomes
effective.
And, that's 2017 for public companies and 2018 for private companies.
What are some of the changes that the new standard has?
Well, under current US GAAP, a lot of the revenue recognition rules are very specific
rule-based guidance.
Under the new standard, the approach to revenue recognition is going to be more based on principles.
And that principle includes the concept of expectation and estimates about what's going
to happen, whereas - under current US GAAP - we only do the fixed and determinable amounts
of revenue recognition.
But, in 2017, when companies issue their financial statements, they may need to present 2015
and 2016 also under the new standard.
That's the retrospective adoption method of the new revenue standard.
There's an alternative adoption method called the Simplified Transition Method."
but it itself is not that simplified because it would require companies to re-state their
financial statements at the beginning of the year of adoption and then to dual-track revenue
throughout that first year of presentation under the new standard.
So, there will be a whole host of issues for companies.
There will be change in their revenue.
In general, you'll be recognizing more revenue sooner, but there will be more complexities
in each one of your revenue recognition transactions, because there will be a lot of subjective
elements and a lot of estimates associated with those transactions.
One example would be software companies are no longer going to be required to have VSOE
for their undelivered elements.
So they may be recognizing all of their license revenue upfront, where currently they're recognizing
revenue ratably over time.
Other changes would include any time there's a potential penalty or a question about the
collectibility of a transaction from the customer, you'll be making estimates on those amounts,
where currently you might be recognizing zero initially and waiting until the transaction
is completed or fully collected before you recognize revenue.
These are just some of changes that are coming with the new standard.
It's going to be a lot of work for companies to transition and comply with the new standards,
and - while 2017 is some time away from now - it's not too soon to get started.
We've had several webcasts here at Tensoft that you can access on our website to go into
this subject in more detail.
And, there's a lot of information available around the web and from the FASB and various
accounting firms.
So I recommend that you take some time, get informed, take a look at the webcasts that
we've done here at Tensoft, and learn all about the new revenue recognition standard.