The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). As stated by the joint parties, the goals of the project were to:

1. Remove inconsistencies and weaknesses in revenue requirements.
2. Provide a more robust framework for addressing revenue issues.
3. Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.
4. Provide more useful information to users of financial statements through improved disclosure requirements.
5. Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

To that end, in May 2014, the FASB and the IASB issued joint documents, Accounting Standards Update 2014–09 Revenue from Contracts With Customers (Topic 606) and International Financial Reporting Standard 15 (IFRS 15) which converged the standards of the two boards.

The core principle of the guidance is that companies should recognize revenue in line with the transfer of goods or services to customers in an amount that the company expects to be entitled to in exchange for those goods or services. The 5 steps used to satisfy this core principle are:

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.

Let’s dig into each of these steps in a little more detail