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  • Revenue Recognition (Topic 605)

    Revenue from Contracts with Customers (including proposed amendments to the

    FASB Accounting Standards Codification®)

    Revision of Exposure Draft Issued June 24, 2010

    This revised Exposure Draft of a proposed Accounting Standards Update of Topic 605 is issued by the Board for public comment. Comments can be provided using the electronic

    feedback form available on the FASB website. Written comments should be addressed to:

    Technical Director File Reference No. 2011-230

    Proposed Accounting Standards Update (Revised)

    Issued: November 14, 2011 and January 4, 2012 Comments Due: March 13, 2012

  • The FASB Accounting Standards Codification® is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. Notice to Recipients of This Exposure Draft of a Proposed Accounting Standards Update The Board invites comments on all matters in this Exposure Draft and is requesting comments by March 13, 2012. Interested parties may submit comments in one of three following ways:

    • Using the electronic feedback form available on the FASB website at Exposure Documents Open for Comment

    • Emailing a written letter to director@fasb.org, File Reference No. 2011- 230

    • Sending written comments to “Technical Director, File Reference No. 2011-230, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856- 5116.”

    Do not send responses by fax. All comments received are part of the FASB’s public file. The FASB will make all comments publicly available by posting them to the online public reference room portion of its website. An electronic copy of this Exposure Draft is available on the FASB website.

    Financial Accounting Standards Board of the Financial Accounting Foundation 401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116

    Copyright © 2011 by Financial Accounting Foundation. All rights reserved. Permission is granted to make copies of this work provided that such copies are for personal or intraorganizational use only and are not sold or disseminated and provided further that each copy bears the following credit line: “Copyright © 2011 by Financial Accounting Foundation. All rights reserved. Used by permission.”

    http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1175801893139� mailto:director@fasb.org�

  • Proposed Accounting Standards Update (Revised)

    Revenue Recognition (Topic 605)

    Revenue from Contracts with Customers (including proposed amendments to the FASB Accounting Standards Codification®)

    November 14, 2011 and January 4, 2012

    Comment Deadline: March 13, 2012

    CONTENTS

    Page Numbers

    Summary and Questions for Respondents ...................................................... 1–10 Proposed Guidance....................................................................................... 11–42 Proposed Implementation Guidance and Illustrations ................................... 43–85 Background Information, Basis for Conclusions, and Alternative View..................................................................................... …86–209 Amendments to the FASB Accounting Standards Codification® ............... 210–441 Amendments to the XBRL Taxonomy ............................................................... 442 Appendix A: Glossary ........................................................................................ 443 Appendix B: Summary of Changes from the 2010 Exposure Draft ........................................................................................................ 444–448

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    Summary and Questions for Respondents

    Why Is the FASB Issuing This Proposed Update?

    Revenue is a crucial number to users of financial statements in assessing an entity’s financial performance and position. However, revenue recognition requirements in U.S. generally accepted accounting principles (GAAP) differ from those in International Financial Reporting Standards (IFRSs), and both sets of requirements need improvement. U.S. GAAP comprises broad revenue recognition concepts and numerous requirements for particular industries or transactions that can result in different accounting for economically similar transactions. Although IFRSs have fewer requirements on revenue recognition, the two main revenue recognition standards, IAS 18, Revenue, and IAS 11, Construction Contracts, can be difficult to understand and apply. In addition, IAS 18 provides limited guidance on important topics such as revenue recognition for multiple-element arrangements.

    Accordingly, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRSs that would:

    1. Remove inconsistencies and weaknesses in existing revenue requirements.

    2. Provide a more robust framework for addressing revenue issues. 3. Improve comparability of revenue recognition practices across entities,

    industries, jurisdictions, and capital markets. 4. Provide more useful information to users of financial statements through

    improved disclosure requirements. 5. Simplify the preparation of financial statements by reducing the number of

    requirements to which an entity must refer.

    To meet those objectives, the FASB and the IASB are proposing amendments to the FASB Accounting Standards Codification® and to IFRSs, respectively.

    In December 2008, the Boards published the Discussion Paper, Preliminary Views on Revenue Recognition in Contracts with Customers. The Discussion Paper explained the Boards’ initial views on revenue, including some of the principles that they proposed as the basis of a future standard. After considering feedback received on the Discussion Paper, the Boards developed those principles into a draft standard.

    In June 2010, the Boards issued the Exposure Draft, Revenue from Contracts with Customers. (The FASB’s version was a proposed Accounting Standards Update.) The Boards received nearly 1,000 comment letters on the 2010

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    proposed Update and, in response, have revised various aspects of the June 2010 proposals. (Appendix B of this proposed Update summarizes those revisions.) Although those revisions did not necessitate reexposure for public comment in accordance with the Boards’ due process procedures, the Boards decided to reexpose the proposals because of the importance to all entities of the financial reporting of revenue and the desire to avoid unintended consequences of the final standard.

    Who Would Be Affected by the Amendments in This Proposed Update?

    The guidance in this proposed Update would affect any entity that enters into contracts with customers unless those contracts are in the scope of other standards (for example, insurance contracts or lease contracts).

    In U.S. GAAP, the guidance in this proposed Update would supersede most of the revenue recognition requirements in Topic 605 (and related guidance). In IFRSs, the guidance in this proposed Update would supersede IASs 11 and 18 (and related Interpretations).

    In addition, the existing requirements for the recognition of a gain or loss on the transfer of some nonfinancial assets that are not an output of an entity’s ordinary activities (for example, property, plant, and equipment within the scope of Topic 360, IAS 16, Property, Plant and Equipment, or IAS 40, Investment Property) would be amended to be consistent with the proposed recognition and measurement guidance in this proposed Update.

    What Are the Main Provisions?

    The core principle of this proposed guidance is that an entity should 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.

    To achieve that core principle, an entity would apply all of the following steps:

    1. Step 1: Identify the contract with a customer. 2. Step 2: Identify the separate performance obligations in the contract. 3. Step 3: Determine the transaction price. 4. Step 4: Allocate the transaction price to the separate performance

    obligations in the contract. 5. Step 5: Recognize revenue when (or as) the entity satisfies a performance

    obligation.

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    Step 1: Identify the contract with a customer A contract is an agreement between two or more parties that creates enforceable rights and obligations. Contracts can be written, oral, or implied by an entity’s customary business practices. An entity would apply the proposed revenue guidance to each contract with a customer unless specified criteria are met for the combination of contracts.

    Step 2: Identify the separate performance obligations in the contract A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. If an entity promises to transfer more than one good or service, the entity would