New Guidance of Revenue Recognition and Automatic Method Changes
Under new guidance of FASB’s Issuance of Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers (Topic 606), the framework for financial statement revenue recognition has drastically transformed the timing and method of taxable income.
Any change to the timing of income recognition will also change the accounting method. Form 3115, Application for Change in Accounting Method must be filed.
The revenue recognition principle is recognized when cash is earned and not when the money is collected.
There are two critical sections in the Tax Cuts and Jobs Act (TCJA), P.L. 115-97.
In Secs. 451(b), accrual accounting is used to recognize taxable income earlier in the year when income is included in revenue.
In Secs. 451(c), taxpayers use tax deferral for any advance payments during the taxable year.
The IRS has helped to minimize the compliance burden for accounting method changes by issuing new designated automatic change numbers such as DCN 231 under Section 16.11 and 16.12 of Rev. Proc. 2019-43, respectively.