Question

THE BOTTOM Changes to Revenue Recoqnition Requirements By Quinn R. Martin, Matthew J. Frazier and Michael J. Devereux Revenue is considered one of the most important financial statement measures. It is used to assess a company's past financial performance, fut ure growth potential and finan- cial well-being. This makes revenue recognition one of the accounting topics most scrutinized by business owners. The Accounting Standards Codification (ASC) 606 standard Revenue from Contracts with Customers, which could take effect to each separate performance obligation would be the as early as this December, could result in different accounting amount of consideration which the mold builder expects to for similar transactions, to in exchange for the goods or services. This will often be the amount specified in the contract or purchase order, but 4. Allocate the transaction price to separate performance obligations. If multiple performance obligations are identi- fied in the contract or purchase order, the amount allocated receive for meeting the milestones outline in the agreement The standard, once effective (see chart), will eliminate many with the customer existing revenue standards and replace about 18o pieces of industry and transaction-specific rules under US. Generally Accepted Accounting Principles (GAAP). The objective of theobligations are met. revenue standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to impove Transitioning and Reporting Requirements comparability within industries, across indust ries and across capital markets. 5. Recognize revenue when (or as) each performance obliga tion is satisfied. That is, revenue is recognized as performance The ASC 606 revenue standard includes extensive disclosure requirements intended to enable users of financial statements Once the new standard takes effect, mold builders will apply o understand the amount, timing, risks and judgments related the same standards for revenue recognition as those in similar to revenue recognition and related cash flows. For example, it and dissimilar industries. That is, the same standard for rev enue recognition will be applied from everything from the salation about contracts with customers. Basically, a narrative of a mold to the production of a plastic part to a bakers' con tract to produce cookies for a local retailer. requires disclosure of both qualitative and quantitative infor- and amounts explaining how revenue is recognized. And, for U.S. GAAP only, provides some simplified disclosure options for nonpublic entities. That is, companies must disclose the methodology they used to determine the proper amount of revenue to be recognized. The Core Principle The core principle of the new standard is that a company would recognize revenue as it transfers goods or services (tools Mold builders may retrospectively apply the new revenue or design services) to customers in an amount reflecting the consideration (the price outlined in the customer contract orpractical expedients. The retrospective transition method of purchase order) it expects to receive, as opposed to recognizing ASC 606 requires all reporting periods presented in the finan- revenue when the risks and rewards transfer to the customer cial statements to be reported under the new guidance, and under the existing revenue standards. To achieve this core principle, tool builders will follow these five steps: standard or use a simplified method that provides for certain Privately Held Companies Periods beginning on or Public Companies Period beginning on or I. Identify the contract(s) with the customer (purchase orders, change orders or customer contracts). after December 15, 2018 (2019 for calendar-year Periods beginning on or after December 15, 2017 Annual reporting (2018 for calendar-year 2. Identify the separate performance obligations contained in a contract. A performance obligation is a promise to a customer to transfer a good or service. For mold builders, these will be the functionality and performance specifications outlined in the pur taxpayers) after December 15, 2017 (January 1, 2018 for eriod beginni after December 15, 2019 Interim reporting (January 1, 2020 for calendar-year taxpayers) Periods beginning after calendar-year tax payers) ase order or agreement. 3. Determine the transaction price ng after December 15, 2016 December 15, 2016 of the contract. The transaction (2017 for calendar-year (2017 for calendar-year taxpayers) rice is the amount of consideration taxpayers) that a vendor expects to be entitled 42 MoldMaking Technology APRIL 2017

Give at least two points that a working accountant will find useful (using complete sentences).

Answer 1

GAAP significant change.

Significate GAAP change was in revenue recognition standard

Converging recognising revenue in contract with customers.

Why it was change

Before GAAP used very detailed and complex revenue recognition criteria. It was very complex for some of the industries like software industries, telecommunication industries, real estate sector etc. Due to which entities used different approach of accounting for similar economic transactions.

The revenue recognition standard had significant change due to address other lssues also like-

a) Due to weakness and inconsistency in current statndard of revenue recognitiin

b) Due to noncomparability of financial statements of entities due different criteria of revenue recognition

c) inadequate disclosurea regarding revenue recognition

d) Weak framework of current revenue recognition standard

Hence the objective of significant change is to address the these issues and to present and prepare th financial statements in more simplified approach giving more accurate details of uncertainity of revenue, nature, amount and timing of revenue recognition

which financial statements are effected

The change effect any reporting enterprise who enters into the contract(contracts which are not covered by any other standard) with customers for:-

a) to transfer goods and services

b) to transfer any non financial assets (e.g. lease contract)

Explanation of significant change

Recoginising revenue which entity expect to be entiled for consideration in exchange for promised goods and services transferred to customers

Recognising revenue-

1) Identify the contract with customers

2) identify the promises in contract

3) determice the transaction price/value of the contract

4) allocate the transfer price to promises of the contract

5) Recognise revenue when reporting enterprise meet the promise in the contract

Reference from - Financial Accounting Statndards Board (FASB)