But not all preparers are ready to embrace the proposed changes. Most of the more than 200 comment letters filed in response to a December 2008 discussion paper issued ahead of the exposure draft supported the idea of creating a single source of concise, meaningful standards, but criticized many of the details prescribed by FASB and its overseas counterpart, the International Accounting Standards Board.
In the exposure draft, FASB and the IASB acknowledge that the proposal may cause temporary upheaval, especially with respect to the required “retrospective application” of the rules. They also acknowledge that the rule revisions will be especially hard on companies with long-term contracts, and for those that find it difficult to estimate stand-alone selling prices at a contract’s inception. To alleviate some of the transition pain, the boards may limit retrospective application if it is impractical, and provide a long lead time before the new standards take effect.
Companies are likely to need the breathing room to retool processes and systems to comply. One of the more significant changes proposed is the way revenue from exclusive licensing agreements is recognized. Under the draft rule, revenue is booked over the life of the contract, instead of up front, when the licensed items are available for use, says Allan Cohen, assistant controller at Time Warner and chair of the financial-reporting committee of the Institute of Management Accountants, a trade group.
That means that when Time Warner and other media and entertainment companies license exclusive syndication rights to television shows, recognition of the contract revenue must be spread over the life of those multiyear agreements. “That’s a pretty significant change,” asserts Cohen, referring to the shift related to when revenue hits the income statement, and a host of new required disclosures surrounding the contract elements.
Not Ready to Roll Forward
The draft rule contains four pages of new disclosure requirements, which include an explanation of changes in contract asset and liability balances from period to period. That means that if a contract is in an asset position, “you have to roll forward your balance-sheet accounts” and show the results in tabular form, explains Cohen. The table includes beginning balances, revenue from performance obligations and transaction price changes, and other adjustments that reconcile the ending contract asset balance — all data that Time Warner has, but is not ready to roll forward in the prescribed manner until its accounting systems are reconfigured.
The draft also requires companies to reveal their “onerous performance obligations” — contracts that lose money and therefore require companies to disclose how transaction prices are allocated to various performance obligations cited in customer contracts.
One of the more contentious allocation issues involves contract options; the proposed rules consider a license-renewal option a discrete element of a contract to which a value must be ascribed, which may take more-subjective judgment on the part of preparers. “Frankly, I am not sure how to value that type of option, because it is never sold separately from the contract,” Cohen says.