The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (“ASU”) No. 2015-14 deferring by one year the effective date of ASU No. 2014-09 “Revenue from Contracts with Customers”.

Public business entities, certain nonprofit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier, as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09.

FASB issued ASU 2014-09 because 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) differed from those in International Financial Reporting Standards (IFRS), and both sets of requirements were in need of improvement. Therefore, ASU 2014-09 was a joint project that clarified the principles for recognizing revenue and developed a common revenue standard for both GAAP and IFRS.

The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised 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. To achieve that core principle of ASU 2014-09, an entity should apply the following steps:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.