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Accounting Methods

Automatic method change for new financial accounting standards applies to early adopters

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Rev Proc 2018-49, 2018-41 IRB

In a Revenue Procedure, IRS has modified Rev Proc 2018-29, 2018-22 IRB 634, and Rev Proc 2018-31, 2018-22 IRB 637, effective on May 10, 2018, to allow a taxpayer that early adopted (Early Adopter) a method of recognizing revenues described in the new financial accounting standards issued by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (New Standards) to change its method of accounting for the recognition of income for federal income tax purposes to a method of recognizing revenues described in the New Standards under Rev Proc 2018-31, 2018-22 IRB 637, Section 16.11. The New Standards were issued by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB). Early adoption of the New Standards was allowed for reporting periods beginning after Dec. 15, 2016.

Background. On May 28, 2014, FASB and IASB jointly announced new financial accounting standards for revenue recognition, titled “Revenue from Contracts with Customers (Topic 606).”

The New Standards were effective for publicly-traded entities, certain not-for-profit entities, and certain employee benefit plans for annual reporting periods beginning after Dec. 15, 2017. For all other entities, the new standards are effective for annual reporting periods beginning after Dec. 15, 2018. Early adoption was allowed for reporting periods beginning after Dec. 15, 2016. Since the joint announcement, FASB and IASB have revised the New Standards and provided guidance on how to implement the New Standards in certain situations.

Under the New Standards, an entity will recognize revenue for promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services based on the following five sequential steps: (i) identify the contracts with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue as the entity satisfies a performance obligation.

In Rev Proc 2018-29, 2018-22 IRB 634, IRS provided the procedures for taxpayers that wanted to change their methods of accounting for the recognition of income for federal income tax purposes to a method of accounting that they use to recognize revenues under the New Standards. Rev Proc 2018-29 provides a new automatic change in accounting method for taxpayers to use to conform with the New Standards. Rev Proc 2018-29 modified Rev Proc 2018-31to add new Section 16.11 to the List of Automatic Changes. Under the New Standards, which concern the recognition of revenue from contracts with customers, an entity must recognize revenue, for financial statement purposes, for goods and services promised to customers in an amount that reflects what the entity expects to receive in exchange for those goods and services. (See Automatic consent to accounting method change for new FASB & IASB financial accounting standards (05/11/2018))

New guidance. Rev Proc 2018-49 modifies the effective date in Rev Proc 2018-29, Section 5.01, and certain paragraphs of Rev Proc 2018-31, Section 16.11, to provide that the automatic method change applies to Early Adopters.

The effective date in Rev Proc 2018-29, Section 5.01, is revised to provide that, except as otherwise provided under Section 5, Rev Proc 2018-29 is effective on May 10, 2018, and applies to tax years ending on or before May 10, 2021. The effective date in Rev Proc 2018-29, Section 5.01, had previously provided that, except as otherwise provided under Section 5, Rev Proc 2018-29 is effective for a taxpayer’s first, second, or third tax year ending on or after May 10, 2018. (Rev Proc 2018-49, Section 3.01)

In addition, Rev Proc 2018-31 is modified to be consistent with the modification made to Rev Proc 2018-29Rev Proc 2018-31, Section 16.11(4), is modified to provide that the change under Section 16.11 may only be made for a tax year ending on or before May 10, 2021. Rev Proc 2018-31, Section 16.11(6), is modified provide that the eligibility rule in Rev Proc 2015-13, Section 5.01(1)(f) does not apply to this change for a tax year ending on or before May 10, 2021.  (Rev Proc 2018-49, Section 3.02)

References: For accounting method changes, see FTC 2d/FIN ¶G-2100 et seq.; United States Tax Reporter ¶4464.21.

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