REVENUE RECOGNITION GAAP in Effect Prior to ASU No. 2014-09 A Chapter Appendix 302 Chapter 5 is based on the revenue recognition approach established in ASU No. 2014-09, which is effective for companies issuing reports under U.S. GAAP for periods beginning after December 15, 2016, and for companies issuing reports under IFRS for periods beginning January 1, 2017. This appendix discusses GAAP that is eliminated by the ASU but that is traditionally covered in intermediate accounting courses. GAAP covered in this appendix will be relevant until the ASU becomes effective, and students taking the CPA or CMA exams will be responsible for this GAAP until six months after the effective date of the ASU. Summary of GAAP Changes Over 200 specific items of revenue recognition guidance were replaced by ASU No. 2014-09 (hereafter “the ASU”). Illustration 5–A1 summarizes some important changes in GAAP that occurred. The rest of this appendix discusses some of these changes in more detail, focusing on aspects of GAAP that usually are featured in intermediate accounting courses but that are eliminated by the ASU. We start by discussing the realization principle, which guided revenue recognition prior to the ASU. Then we discuss the installment sales and cost recovery methods, which were used when collectibility of receivables was very uncertain. We PREFACE Additional Consideration Transitioning to ASU No. 2014-09. Given the importance of revenue recognition and the changes in information systems and reporting practices necessary to implement the new ASU, the FASB gave companies over two years before requiring that it be adopted. The FASB also allowed companies to choose between two alternatives to transition to the ASU. • Retroactive Restatement: This approach restates prior years to appear as if the ASU had been used all along, similar to the approach used for other accounting changes. For example, prior-year revenue, net income, and retained earnings are adjusted to reflect the ASU. • Prospective: This approach applies the ASU only to new contracts and to contracts that have not been completed as of the date the ASU is initially adopted by the company. Under this approach, the company only adjusts the opening balance of retained earnings in the year the ASU is adopted to account for the cumulative effect of the ASU on net income recognized in prior years with respect to uncompleted contracts. Allowing two approaches for adopting the ASU reduces comparability between companies.
Spiceland_Inter_Accounting8e_Ch05
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