New Accounting Pronouncements: Revenue Recognition & Leases

By | December 8, 2016

By Robert J. Behr, CPA

The FASB and the International Accounting Standards Board (IASB) are continuing to attempt to converge the standards into an International Financial Reporting Standard (IFRS). The changes related to Revenue Recognition and Leases are expected to provide more transparency and comparability of information for the intended users of financial statements.

Revenue Recognition

On May 28, 2014, the FASB issued Accounting Standards Update No. 2014-09 – Revenue from Contracts with Customers (Topic 606). The application of the following five steps guides the recognition of revenue pursuant to the core principles of the new standard:

  • Identify the contract with a customer
  • Identify the separate performance obligations
  • Determine the transaction price
  • Allocate the transaction price to the performance obligations
  • Recognize revenue when (or as) the performance obligation is satisfied

Additional guidance was recently issued in March of 2016 in regards to specific areas such as, Principal versus Agent Considerations – Reporting Revenue Gross versus Net and further guidance is expected to be issued to provide additional clarity on specific issues. Management should review the new guidance to determine the exact implication on your company’s financial statements, operations and performance measurements, contracts, accounting policies, internal control processes and tax planning.

This new standard is not effective for nonpublic companies until annual periods beginning after December 15, 2018.

Lease Accounting

On February 25, 2016, the FASB issued Accounting Standards Update No. 2016-02 – Leases (Topic 842). There are provisions in the new standard that could impact almost all entities to some extent, although lessees will likely see the most significant changes. Lessees will need to recognize virtually all of their leases on the balance sheet, by recording a “right-of-use” asset and a lease liability.

The new standard still differentiates between a capital (now called finance) lease and an operating lease based on specific criteria. While the accounting for finance leases is similar to that under the old standard, the accounting for operating leases is significantly different. Previously, the accounting for operating leases only impacted the income statement. Under the new standard, the balance sheet will be impacted through the requirement to record a right-of-use asset and a lease liability in an amount equal to the net present value of the lease payments. Similar to the current standard, operating leases will reflect lease expense generally on a straight-line basis. The straight-line expense will reflect the interest expense on the lease liability and amortization of the right-of-use asset. Lease expense will be presented as a single line item in the operating section of the income statement.

While the new standard provides transition guidance for existing leases, the impact of this standard on an organization is unknown at this time as lease agreements; debt covenants, etc. may need to be updated. Management should begin to review the leases for the proper accounting treatment under this standard, especially, as it relates to lease extensions, modifications and related party leases, if applicable.

Although the effective date of this standard for nonpublic companies is for fiscal years beginning after December 15, 2019 (with early adoption permitted), it is important to start to evaluate the impact of this standard in the near future.

Volume 3, Issue 2
Spring 2016


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