ASU 20014-09 Daily Digest: Why Is the FASB Issuing This Accounting Standards Update (Update)? (ASU 2014-09) (ASC 606)

As I begin to make my way through this ASU, I plan to share some sections or portions with you, on a daily basis, thereby implementing the “divide and conquer” principle when it comes to digesting this new pronouncement which is over 800 pages in length.  We have about two years to process it, which means if we process about 1-2 pages per day we can get through it in two years or less…

Here is an excerpt from the beginning of ASU 2014-09, Section 1, Page 1, which explains, in fairly accessible terms, why FASB is, in effect, re-engineering the revenue recognition codification (replacing ASC 605 with ASC 606):

“Revenue is an important number to users of financial statements in assessing an entity’s financial performance and position. However, previous revenue recognition requirements in U.S. generally accepted accounting principles (GAAP) differ from those in International Financial Reporting Standards (IFRS), and both sets of requirements were in need of improvement. Previous revenue recognition guidance in U.S. GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited guidance and, consequently, the two main revenue recognition standards, IAS* 18, Revenue, and IAS* 11, Construction Contracts, could be difficult to apply to complex transactions. Additionally, IAS* 18 provides limited guidance on important revenue topics such as accounting 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 IFRS that would:

1. Remove inconsistencies and weaknesses in 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 is amending the FASB Accounting Standards Codification® and creating a new Topic 606, Revenue from Contracts with Customers, and the IASB is issuing IFRS 15, Revenue from Contracts with Customers. The issuance of these documents completes the joint effort by the FASB and the IASB to meet those objectives and improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS.”

End notes:

* International Accounting Standard