The Financial Accounting Standards Board (FASB) has updated the U.S. Generally Accepted Accounting Principles (GAAP) that went into effect in 2018 for public companies and 2019/2010 for private companies. This means that you need to update your policies and systems to meet the new accounting standards, depending on the nature of your business. Revenue recognition standards (ASU No. 2014-09, Revenue from Contracts with Customers) for companies in the construction, software, media, telecommunications, manufacturing, banking, insurance and healthcare industries are mainly affected by this.
The main purpose of the revised standards is to establish comparable revenue recognition practices across companies, industries, jurisdictions, and capital markets, and also provide useful revenue information on financial statements. The basic principle is that companies should recognize revenue for the transfer of goods or services to customers equal to the amount of payment expected in exchange for the goods or services. As per these standards, companies must report revenue using the following process:
- Work out a contract with their customers.
- Perform their obligations under the contract (transfer of good or services).
- Set a transaction price or payment, taking into consideration any variables.
- Assign the transaction price to the performance obligations in the contract.
- Record revenue when the performance obligations are met.
Please note that the revised accounting principles do not replace the standard Accrual or Cash Accounting Standards. The above process can still be done in Core via the regular A/R workflow of sending invoices and receiving payments. If you want to recognize revenue outside of this regular workflow, you can do that manually in Core. Please check this KB article for that.
Please check these articles for more information.