The Financial Accounting Standards Board and the International Accounting Standards Board have jointly published a draft standard to improve and align the financial reporting of revenue from contracts with customers and the related costs.

Sir David Tweedie

If adopted, the proposal would create a single revenue recognition standard for International Financial Reporting Standards and U.S. GAAP that would be applied across various industries and capital markets. The boards noted that publication of this joint proposal represents a significant step forward toward global convergence in one of the most important and pervasive areas in financial reporting. 

“The proposal by the two boards is the result of our intensified joint efforts,” said IASB Chairman Sir David Tweedie in a statement. “It is an important step towards a single global principle-based standard that would make it absolutely clear when revenue is recognized—and why. We shall want to hear the views of all those affected by the proposals.

The proposed standard would replace IAS 18, “Revenue,” IAS 11, “Construction Contracts,” and related interpretations. In U.S. GAAP, it would supersede most of the guidance on revenue recognition in Topic 605 of the FASB Accounting Standards Codification. 

The core principle of the draft standard is that an entity should recognize revenue from contracts with customers when it transfers goods or services to the customer in the amount of consideration the entity receives, or expects to receive, from the customer.  The proposed standard would improve both IFRS and U.S. GAAP by removing inconsistencies in their existing requirements; providing a more robust framework for addressing revenue recognition issues; improving comparability across companies, industries and capital markets; requiring enhanced disclosure; and clarifying the accounting for contract costs.

“This proposal marks a key milestone in our joint efforts to improve and converge our standards in one of the most important and pervasive areas in accounting,” said FASB Chairman Robert Herz in a statement. “The unanimous agreement of the boards on this proposal is the culmination of an intensive process of working together jointly. The proposed new standard not only seeks to reduce complexity by streamlining the way revenue recognition principles are applied across various industries and transactions, but it also aims at eliminating inconsistencies in existing revenue recognition standards and practices.”

In developing the proposals, the boards considered more than 220 comment letters they received on a discussion paper, in addition to feedback received from interested parties through an extensive outreach program, including workshops with preparers. The boards will undertake further outreach activities during the exposure draft’s comment period to ensure that the views of all interested parties are taken into consideration when finalising the standard.

The exposure draft, “Revenue from Contracts with Customers,” is open for comment until Oct. 22, 2010, and can be accessed via the “Comment on a Proposal” section of www.iasb.org or on www.fasb.org.

A live webcast introducing the proposals is planned for early July. Details will be available on the FASB and IASB Web sites soon. Summaries of the proposals will also be available soon to download free of charge from the IASB and FASB sites at http://go.iasb.org/revenue+recognition and http://www.fasb.org.