The U.S. and international accounting standards-setters are sending project leaders around the world to calm any leftover qualms about proposed changes to revenue-recognition rules.
Change was deemed necessary because the existing rules were confusing and caused many unintentional errors in financial statements. But the proposal, under which the previously far-flung guidance on the topic would be melded into a single tidy package, hasn’t cleared up much confusion.
The first exposure brief on the matter, in late 2010, generated nearly 1,000 comment letters. “It was one of the most hotly debated exposure drafts in quite some time,” says Robert Bedwell, a partner at accounting firm Cherry, Bekaert & Holland.
In response to the debate, the Financial Accounting Standards Board and International Accounting Standards Board issued a second exposure draft this past November. So far, formal reaction has been tepid relative to the earlier document. By press time, the boards had received just 18 comment letters, most of which asked for more time to provide feedback. Comments are due by March 13, and most likely more letters will be sent in as that date nears.
Despite the small number of comments, FASB and the IASB are moving ahead with their plan for what amounts to a grassroots campaign to address any remaining misgivings about the proposed new standard, called “Revenue from Contracts with Customers.” The boards have been trying to finalize a converged revenue-recognition standard for four years and clearly don’t want to waste any more time.
Through what FASB project leader Kristin Bauer calls “extensive outreach,” the boards are using the current comment period not only to explain their intentions but also to track down any unintended consequences before issuing the final standard. Behind the scenes, the rule-makers are hearing mostly technical questions, rather than the overarching inquiries that characterized the comments to the first exposure draft.
The rule-makers plan to do away with all industry-specific guidance to create one rule based on nearly 100 GAAP pronouncements and two broad IFRS rules. The objective is “to develop a single, principles-based standard and robust framework to address all revenue issues, increasing comparability across all industries and capital markets, and provide greater disclosures,” says Bauer, a FASB practice fellow who is leading the project. She spoke during a Wednesday webcast about frequently asked questions the boards are receiving on their rules proposal.
According to the exposure draft, a company would recognize revenue when “it satisfies a performance obligation by transferring a promised good or service to a customer,” which occurs “when the customer obtains control of that good or service.” Under the current rules, similar companies with similar transactions have ended up with very different results. Some companies are already preparing for the changes, even though the earliest the new rules would apply would be for financial-statement filings starting January 1, 2015. “Companies that have complex or interrelated IT systems and accounting statements are already gearing up for this,” says Bedwell.
But not everyone needs to put many resources against the matter just yet. The construction industry, for example, “won’t have fundamental changes,” says Stephen Thompson, a KPMG partner in the firm’s accounting advisory services practice. That is despite the fact that nearly a third of the letters during the first go-round were from construction companies. They worried they would be limited to recognizing revenue only at the very end of a project, rather than during certain parts of it.
Under the latest proposal, some companies will be able to recognize revenue earlier than they do now, in certain circumstances, if they are “reasonably assured” when they deliver the first portion of a good or service that the project will continue and they will be paid again when the next good or service is due for delivery.
Overall, the literature is straightforward, Thompson says. But there may be confusion, temporarily he believes, for companies not used to new principles, particularly those in the software industry. While some companies, like Apple, have tested out the concepts and enjoyed the reward of accelerated revenue recognition, it may create a lot of work for finance departments that will have to implement the changes.
Software companies have adjusted to waiting to book revenue on transactions for as long as two years after a transaction’s initiation. The new rule may cause changes in how such companies communicate with analysts and revisions to customer contracts. And not all companies may view booking revenue sooner as a benefit. “This will create a lot of work for some companies,” Thompson says.
Some of the feedback the boards are receiving may result in further tweaks. For instance, the rule-makers have heard many questions about how a company is supposed to determine whether a good or service is “distinct” or “bundled,” which will result in different accounting treatments. “We are certainly aware that we could perhaps clarify the explanation with perhaps another example or two,” says Glenn Brady, a senior technical manager for the IASB.
While some small word changes may be in store, U.S. GAAP followers aren’t likely to see major revisions between this latest proposal and the final rule, which is expected at the end of this year or the first quarter of 2013.