Over the past few weeks, you’ve probably heard a lot about the 2018 CPA Exam changes, specifically to the FAR Exam’s Revenue Recognition topic. We’ve accumulated some of the top questions surrounding this topic change and provided answers from our expert CPA team.
What is Revenue Recognition?
Revenue Recognition is a basic accounting principle under GAAP that determines the specific conditions under which an entity recognizes or accounts for revenue.
Why is Revenue Recognition changing on the CPA Exam?
This change to the FAR section of the CPA Exam falls in line with FASB’s issuance of a new Revenue Recognition standard, ASU 2014-09, Revenues from Contracts with Customers (Topic 606) in May of 2014. The standard has been amended several times, and now goes into effect for public organizations’ annual reporting periods that begin after December 15, 2017, and nonpublic organizations’ annual reporting periods that begin after December 15, 2018.
It is eligible for testing on January 1st, 2018 in accordance with the AICPA’s CPA Exam Policy on New Pronouncements which states, “accounting and auditing pronouncements are eligible to be tested in the later of: (1) the first testing window beginning after the pronouncement’s earliest mandatory effective date, or (2) the first testing window beginning six (6) months after the pronouncement’s issuance date.” In this case, option (1) applies.
Why do we have a new Revenue Recognition standard?
The basis of these changes is in response to our economy shifting from producing mainly tangible goods and providing services under simple arrangements to including intangible goods and providing services under complex service arrangements. For example, several decades ago, an auto garage would sell tires and charge a one-time fee to install them at one location. More recently, auto garages have improved their offer with a guarantee to replace such tires at a pro-rata cost at any location in the franchise. Now, a network of providers may contract with subscribing drivers to provide roadside service for a year.
The above is just one example of how transactions have become more complex. But if you take into consideration the types of services we have become accustomed to, such as computer software, website access, monthly subscriptions, etc., you begin to realize the complexities are endless. Consequently, the standard setters have amended Revenue Recognition rules repeatedly to adjust to these increased complexities, resulting in a patchwork of hundreds of quirky rules, often based on individual industries.
The new Revenue Recognition standard results in a more uniform treatment across industries as well as a more accurate reflection of underlying transactions. This streamlines the process of determining when revenue should be recognized, although accountants may encounter hurdles in the transition period as they consider issues from a new perspective. The new standard also brings US GAAP into closer alignment with International Accounting Standards (IAS), as the treatment under both sets of standards was developed jointly.
Ultimately, these changes have the ability to affect every business’ day-to-day accounting activities, as well as the way they execute contracts with their customers.
How will the change in Revenue Recognition affect CPA Exam candidates?
The previous CPA Exam tested on Revenue Recognition, however, it did not test at a very intricate level. This was primarily due to that fact there was such an abundance of rules, many very industry-specific, and the variations made it difficult to test thoroughly. Now, the new streamline in standards actually make it easier for examiners to deliver more in depth and challenging questions on the material. It is for this reason we highly recommend taking FAR in 2017 before the 2018 changes occur.
How is Roger CPA Review helping students prepare for the Revenue Recognition changes?
We’re always dedicated to ensuring our students have access to fresh, relevant materials no matter when they plan to sit for the CPA Exam. Right now, CPA candidates that enroll in our program can customize their course with any combination of 2017 and 2018 course materials at checkout. While we recommend choosing 2017 materials for FAR, and passing now, our team has worked vigorously to ensure all 2018 course materials are thoroughly updated with all 2018 CPA Exam changes, including a dedicated focus on the new Revenue Recognition standards. Plus, our new SmartPath Predictive Technology™ will keep you on the right study path with data-driven, targeted recommendations on where to focus your study efforts. Try SmartPath today with a Free Trial.
(Source: “Revenue Recognition” - aicpa.org)