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It Is Year One for New Revenue Recognition Standard

In the year of the adoption of the new revenue standard, an entity has two method of adoption options, the Full-Retrospective Method and the Modified-Retrospective Method.

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In the year of the adoption of the new revenue standard, an entity has two method of adoption options, the Full-Retrospective Method and the Modified-Retrospective Method.

On May 28, 2014 the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued their final standard on revenue from contracts with customers. The standard, issued as ASU 2014-09 (as amended) by the FASB and as IFRS 15 (as amended) by the IASB, outlines guidance for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. 

The effective date for all non-public entities are annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. 

The updated guidance established a five-step process for recognizing revenue from contracts with customers as follows: 

  1. Identify the customer contract(s); 
  2. Identify the performance obligation(s) in the contract; 
  3. Determine the transaction price; 
  4. Allocate the transaction price to the performance obligation(s) in the contract; and, 
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

In the year of the adoption of the new revenue standard, an entity has two method of adoption options, the Full-Retrospective Method and the Modified-Retrospective Method. 

FullRetrospective Method 

Under the full-retrospective method, an entity must restate the prior year’s comparative financial statements to conform with changes as result of adopting the new revenue recognition standard on all applicable contracts. For example, an entity presenting a two-year financial statement for the years ending December 31, 2019 and 2018, would need to restate 2018 to conform with the new revenue recognition standard. 

Modified-Retrospective 

Under the modified-retrospective method, an entity does not restate prior years on a comparative financial statement to conform with changes as result of adopting the new revenue recognition standard. Instead, a single adjustment is made to equity at the start of the first year of adoption onexisting and future contracts as of the effective date. Here is an example of the presentation: 

While a simplification of the impact on the core financial statements, additional disclosures are required under the modified-retrospective method to assist with comparability to the previous year.   

Pros and Cons 

The adoption method is an important decision for an entity. An entity may opt to utilize the full-retrospective method for comparability purposes for the users of the financial statements, especially if the new revenue recognition standard results in a significant change in revenue recognition. However, this approach may take considerably more time to implement than the modified-retrospective method.   

Some pros and cons here include: 

  FullRetrospective  Modified-Retrospective 
Pros 
  • Comparability across periods 
  • More comprehensive information for users 
  • Less historical data required for adoption 
  • Quicker implementation 
Cons 
  • High volume of data to restate forprior periods 
  • Historical data may be difficult to obtain 
  • Longer implementation  
  • Must keep two sets of accounting records in the year of adoption to disclose impact of change 
  • Additional disclosure requirements 
  • Lacks comparability 

 

Naturally, it is imperative that an entity analyzes the pros and cons of each adoption method, starting with those items listed above.    

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