New 5-Step Model for Revenue Recognition and Expected Impact to Industry Accounting
Published in 2014, Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, is effective in 2018 for most public companies (including those meeting the criteria of Public Business Entities (PBEs) and 2019 for most private companies. It replaces reams of industry-specific guidance in US Generally Accepted Accounting Principles (GAAP) with a broad, principles-based method for most businesses to tally revenue. Along with introducing the application of a five-step model to determine how revenue is ultimately reported, the standard also requires enhanced financial statement disclosures which are more extensive than current requirements and will need to be evaluated, and changes to the financial statements implemented as appropriate.
5 Steps for Revenue Recognition
In response to addressing industry specific issues, the AICPA formed the Brokers and Dealers in Securities Revenue Recognition Task Force, which has been charged with developing the framework and guidance around revenue recognition implementation issues and providing illustrations. There are nine topics on the Task Force’s agenda. As of the date this document was prepared:
- Three have been finalized by the AICPA RRWG (Revenue Recognition Working Group).
- Two are out for exposure and available in draft form (i.e., public comment).
- Three have been submitted (or re-submitted) to the AICPA RRWG for review.
- One has been considered finalized but was deemed to be “out of scope” (Revenue from Financial Instruments).
The following represents the various topics and the “Expected Overall Level of Impact to Industry Accounting,” as has been prescribed by the Task Force, as well as a brief summary (where made available):
- Commission Income – Finalized; Expected Impact: Minimal – Recognition criteria to focus on:
a) Identification of the contract(s) with the customer; b) Identification of the performance obligations in the contract; c) Determination of the transaction price; d) Allocation of the transaction price to the performance obligations in the contract; and e) Recognition of the revenue when (or as) the entity satisfies a performance obligation.
- Commission Income – Trade Date vs. Settlement Date – Finalized; Expected Impact: Minimal – Based on analysis performed, FinREC (Financial Reporting Executive Committee) believes that control of the trade execution performance obligation transfers on the trade date.
- Costs Associated with Investment Banking Advisory Services – Finalized; Expected Impact: Moderate – Focuses on advisory services for assistance with the sale of a company. Determination should be made as to whether the broker-dealer is acting as principal vs. agent. Additionally, the key recognition criteria focus on:
a) Initial recognition and costs to obtain a contract vs. those to fulfill a contract; b) Subsequent measurement; and c) Presentation.
- Principal vs. Agent: Costs Associated with Underwriting – Out for Exposure; Expected Impact: Minimal – Criteria within the draft pertain to determination of which functions constitute acting as an agent versus those consistent with acting as a principal. Pertinent items noted in this consideration relate to “control of the specified good or service” and “risk.”
- Soft Dollar Revenues – Out for Exposure; Expected Impact: Minimal – Focuses on arrangements in which a broker-dealer provides research to a customer in return for certain volume trades from that customer.
- Selling and Distribution Fee Revenue – Re-Submitted to AICPA RRWG
- Underwriting and Related Fee Income – Submitted to AICPA RRWG
- Advisory Fee Income – Submitted to AICPA RRWG
For broker-dealers, these changes are effective for fiscal years beginning after December 15, 2017.
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