Why did the FASB issue a new Revenue Recognition standard?
The new standards are principles-based Intead of rule- base, and explaining how those principles are meant to work together to create a consistent and operational model that can be applied in evaluating how much revenue to recognize and when to recognize it.
Topic 606 and IFRS 15 lay out a framework for recognition of revenue that should reduce diversity while improving the reporting of revenue.
Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The new standard is based on clearly articulated principles and avoids industry or rules-based guidance in most cases.
U.S. GAAP practitioners are accustomed to more detailed guidance that was rules-based in some areas, and nonexistent in others
IFRS practitioners are accustomed to guidance that was so broad that many practices could be justified, resulting in diversity that was often only ameliorated when companies looked to U.S. GAAP for more guidance.
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.
Presently, GAAP has complex, detailed, and disparate revenue recognition requirements for specific transactions and industries including, for example, software and real estate. As a result, different industries use different accounting for economically similar transactions.
The objective of the new guidance is to establish principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The new guidance:
- Removes inconsistencies and weaknesses in existing revenue requirements;
- Provides a more robust framework for addressing revenue issues;
- Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets;
- Provides more useful information to users of financial statements through improved disclosure requirements; and
- Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer.
The objective of the new guidance is to establish principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers.
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