It is important to consider new IRS guidance to ease transition to the Revenue Recognition Rule. In 2014 the IRS revenue recognition standard took effect for publicly traded corporations. Almost all other businesses were required comply to the new standard in late 2018.
The Financial Accounting Standards Board (FASB) released the revenue recognition standard after spending years closing the gaps between US Generally Accepted Accounting Principles (GAAP) and international financial reporting standards.
Many businesses (and accounting professionals) had a hard time adapting to the new procedures. As a result the IRS has recently released new guidance to ease transition to the Revenue Recognition Rule.
The new changes will allow for more book to tax conformity while streamlining requests to change accounting methods to the new standard.
The IRS has standardized the way a taxpayer would request an automatic consent from the IRS to change their method of recognizing income to the new standards. The consent granting the change coincides with the year the taxpayer adopts the new revenue recognition standard.
Prior to the new standards the US GAAP provided several different methods for accounting for “revenue” for specific transactions based upon many factors including the subject company’s industry. Companies in differing industries used different methods for identifying and reporting revenue. This made it difficult for investors to evaluate the performance of domestic and international companies as well as their projected path for the future. The new standards will impact domestic and international business and taxation strategies as well as accounting methodology.
The FASB standard established the core principle:
“Recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”
Basically, revenue is realized by a 5 step process:
- Identify the contract with a customer
- Identify the performance obligations (promises) within the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations within the contract
- Recognize revenue when (or as) the reporting organization satisfies a performance obligation
While the IRS revenue recognition standard was intended to ease transition to the Revenue Recognition Rule, it has brought significant changes to many corporate accounting systems, methodologies, processes and ultimately will impact business decisions and taxation implications.
If you have questions regarding IRS revenue recognition standard or how to best implement the standard into your company we invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
