A recent survey of the Financial Accounting Standards Board’s advisory group, the Financial Accounting Standards Advisory Council, identified revenue recognition as FASB’s top issue for the fourth consecutive year.
The United States has no general-accounting standard on revenue recognition. Practices have developed for certain industries and for certain transactions, but answers can be inconsistent, and finance executives in some industries can do no better than to piggyback off the guidance provided to others. The general sense is of a very complex issue that bears on divergent practices, from industry to industry, and a substantial amount of judgment by finance teams.
In a joint meeting with the International Accounting Standards Board on October 24, FASB continued to chip away at the revenue recognition project by clarifying the identification and measurement of performance obligations using an allocation of the customer consideration amount.
FASB had shifted to the allocation method earlier this year, after certain issues with fair value could not be resolved. Notes board member Michael Crooch, however, “I’m finding that some of the issues that we faced with fair value continue to be problematic when we change the measurement approach.”
Even so, IASB and FASB agree on many issues regarding the measurement and allocation of items within a revenue contract. The sale of a car for $20,000, suggests project manager Mike Tovey, may require that a certain portion of the sale price be allocated to the warranty, while the balance is allocated as the customer consideration.
The board tentatively agreed that in revenue contracts, performance obligations should be disaggregated from the customer’s point of view and based on whether the deliverable has “utility” to the customer. The board cleaned up some of the wording for what would fall under that definition, says Tovey. One determining factor would be if a disaggregated component of the contract could be sold separately. Another would be if it obligates the company to “stand ready” to provide goods or services to the customer if specified events occur — such as damage that covered by a warranty, to use Tovey’s example.
Tovey notes that FASB is in favor of measuring stand-ready obligations using the allocation method, which works by disaggregating components of the contract, pricing each component, aggregating the prices, and comparing the to the amount received from the customer. The difference would be assigned on a pro rata basis to each component, he adds. IASB, on the other hand, favors allocating standby obligations at fair value, but “I wouldn’t interpret the difference as something fixed in stone,” says Tovey.
As a next step in the revenue recognition project, FASB will address how assets and liabilities are created by a revenue contract. The board will also discuss the meaning of “performance” and how that affects the revenue a company can recognize in any given period. Tovey notes that this project is “still very early on” — the board has targeted the third quarter of 2006 to issue a preliminary views document — so an exposure and final draft are still “a few years out.”
On October 27, FASB also conducted a roundtable discussion with several constituents regarding its business combinations project. Roundtables let practitioners raise questions and concerns directly with board members on particular issues and allow both sides to flesh out ideas. Since the board had already addressed most of the issues and exposed them for public comment, however, “I don’t think the board heard anything not previously considered,” says Crooch.
Project manager Stephanie Tamulis says that while most investors have been supportive, many in the accounting industry still take issue, especially on matters concerning step or partial acquisitions, in which one company obtains a controlling interest in another. “People are objecting to [FASB's approach of] recognizing everything at fair value on the acquisition date,” she explains. “They prefer to account for each investment as it occurs and add them together.”
The FASB staff is reviewing comments on the exposure draft, says Tamulis, and will provide its own comments to the board in January. The board will need to redeliberate “pretty much everything,” she adds, and won’t wrap up the business combinations project until 2007.
Last week the board did not hold its customary meeting. This week, FASB will meet on Thursday instead of Wednesday to discuss launching a project to address the issue ranked second in importance in that recent advisory-group survey: accounting for pensions and other post-retirement benefits.