The Financial Accounting Standards Board and the International Accounting Standards Board have released their long-awaited converged standard on revenue recognition after more than a decade of effort.
The standard for the recognition of revenue from contracts with customers is intended to improve the financial reporting of revenue and improve comparability of the top line in financial statements globally.
The two boards plan to set up a transition resource group to help companies adjust to the new standard and provide guidance before it takes effect in 2017 for public companies and 2018 for private companies.
“The issuance of the revenue recognition standard is a major achievement for both the FASB and the IASB,” said FASB chairman Russ Golden in a conference call with reporters. “The boards have worked together for more than 10 years on this guidance. During that time, we've issued multiple exposure drafts, conducted numerous meetings with stakeholders across the globe and worked tirelessly to ensure that this standard is as useful and operable as possible. The result, I believe, is a standard that succeeds in its goal of improving financial reporting. It does so by providing a more robust framework for addressing revenue issues as they arise, by increasing comparability among industries and capital markets, and by requiring enhanced disclosures that give investors and other users a better understanding of the economics behind the numbers.”
[IMGCAP(1)]FASB and the IASB plan to create a Revenue Recognition Joint Transition Resource Group to help companies adjust to the new standards “The issuance of the new standard is not the end of our work,” said Golden. “The boards are taking steps to ensure a smooth transition to the standard. This includes the creation of a transition resource group, which will be announced in the coming weeks. The purpose of this group is to alert the FASB and the IASB to potential implementation issues so that they can be addressed prior to the effective date. The transition resource group Web site will include instructions on how stakeholders can submit their concerns to this group.”
Golden had said at a conference at the beginning of this month that the standard would be released by the end of the month (see FASB Anticipates Revenue Recognition Standard Release This Month).
Revenue is a vital metric for users of financial statements and is used to assess a company’s financial performance and prospects. However, the previous requirements of both U.S. GAAP and International Financial Reporting Standards were different and often resulted in different accounting for transactions that were economically similar. While the revenue recognition requirements of IFRS lacked sufficient detail, the accounting requirements of U.S. GAAP were considered to be overly prescriptive and conflicting in certain areas.
Responding to these challenges, the boards have developed new, fully converged requirements for the recognition of revenue in both IFRS and U.S. GAAP, providing substantial enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and U.S. GAAP.
[IMGCAP(2)]“The successful conclusion of this project is a major achievement for both boards,” said IASB chairman Hans Hoogervorst in a statement. “Together, we have improved the revenue requirements of both IFRS and U.S. GAAP, while managing to achieve a fully converged standard. Our attention now turns to ensuring a successful transition to these new requirements.”
“I think this is a fine achievement and a great example of cooperation between the two boards,” said IASB vice-chairman Ian Mackintosh in the same conference call with Russell Golden. “It was a long period, as Russ said, to get this standard together. It was an enormous amount of outreach and cooperation for what is a global market, but we've got the largest economy in the world and we've got 100 other economies who will all be covered by this standard. I totally agree that for both of us, both the IASB and FASB, this represents an improvement on the present situation, and further from that it means we have the same situation around the world, so that when you start reading revenue numbers you should as time goes by you should get confidence in those numbers and understand what they mean.”
The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods of services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements.
[IMGCAP(3)]“This will change the way people should be thinking about recognizing and analyzing revenue,” said FASB member Marc Siegel in an interview. “Today in U.S. GAAP you've got a process where you have to understand where the earnings process is completed. That’s a little bit of a nebulous concept. The new standard will have companies analyzing assets and liabilities associated with contracts from customers, and the revenue will fall out as those performance obligations, those liabilities, are satisfied by the seller. I think that’s a little bit of a change in process that people need to understand as they're thinking about the revenue transactions and implementing the new standard going forward.”
The standards will affect more than just revenue from customer contracts, Siegel noted.
“The other big change is that even though this is titled 'Revenue from Contracts with Customers,' it does affect sales of non-financial assets to non-customers too,” he said, pointing to sales of real estate, for example. “Even though you might not be a home builder and you might just be a general manufacturer, if you sell your building or your headquarters land, whereas today you would have to go through a very detailed and prescriptive FAS 66 analysis to understand when you can recognize that gain on your sale of real estate, you would look to this new standard to figure out when you would recognize and measure the gain. It wouldn't be showing up as revenue, but it would help you understand how and when to recognize the gain on the sale of real estate.”
Besides the real estate industry, many others will be affected as well. “I think one of the benefits of the new standard is that it's the same way to analyze revenue irrespective of the industry you happen to be in,” said Siegel. “That means that one industry will probably have similar outcomes in terms of when revenue is recognized and other industries will probably have to change in terms of the outcome. The longer and more complex the contract is, the chances are that you would have to analyze this more closely.”
Among the industries likely to be affected are the telecommunications and automotive sectors. “What we heard from companies during deliberations is that the telecommunications industry anticipates this could significantly impact them, particularly when they sell a handset at the same time concurrently they sign you up for a service plan,” said Siegel. “That’s probably going to be different under the new standard than what they have today. Today they have what's called a contingent cap. Tomorrow they'll be under the new standard so it would impact them. We also heard from automobile manufacturers that they might look at the customer incentives that they offer a little differently under the new standard than they do today.”
The software and media industries are also likely to see an impact in the licensing area. “We spent a lot of time analyzing licenses,” said Siegel. “That's in software and also potentially media. We think they're going to have to analyze the new standard to understand how it might impact what they're doing today.”
For example, with software licenses there is a difference in revenue recognition between term licenses and perpetual licenses, he noted. “That distinction goes away under the new standard,” said Siegel. “You have to look a little more deeply into the promises you're offering to your customer under the software agreement, to help start figuring out when and how to recognize revenue. That would be a little different.”
For media companies, they will have to look at how they are recognizing royalties. “Sales-based or usage-based royalties that are given in exchange for a license of intellectual property, those will be recognized at the later of the subsequent sale or as usage occurs, or the performance obligation has been satisfied or partially satisfied, whichever one is later, under the new standard. There's going to be some differences. A lot of this is because under the current rules, these different little industry nuances have evolved over decades of time, and they're very hard to maintain. Going forward, we're going to have one way of looking at it irrespective of the industry.”
The asset management industry will also be among those most affected, according to Golden.
There were a few lingering differences between the two boards in the standards they are issuing, particularly in the disclosure requirements for interim reporting periods and in the threshold for probable collectability of a contract. “Of the two most significant differences, one has to do with the disclosure requirements and whether or not there is a specific disclosure requirement for interim financial statements,” said Golden. “The FASB did vote to have a requirement that certain disclosures be required for interim, and that is because in the U.S. capital markets, there is oftentimes more interim financial reporting than in other capital markets around the world. With respect to the collectability threshold, while it's the same word, it does have different meanings between U.S. GAAP and IFRS, but the reason for that difference is because of where we came from. That is, with the FASB, it's 'probable,' meaning a high level. That's really consistent with what we have today, whereas with the IASB, 'probable' is more what we would say in U.S. GAAP is 'more likely than not,' which I think is consistent with what they have today.”
[IMGCAP(4)]“We just have a different situation with the interims, and that was the reason,” said Mackintosh. “Probable is an historic one, and we're hoping this won't make a big difference in the actual application of the standard.”
Golden added that he thinks the collectability difference should have only a small impact.
The boards have together consulted extensively with interested parties throughout the life cycle of the revenue project, seeking public comment at each stage of the development process and further refining their proposals in response to that feedback. In total, the boards received more than 1,500 comment letters in response to their work.
Joint Transition Resource Group
Furthermore, the boards have established a joint transition resource group in order to aid transition to the new standard. Further details about that group will be announced shortly.
“The transition to a new revenue recognition standard is very important to us,” said Siegel. “It's a very important performance indicator for companies and a very important metric for users of financial statements, so we're committed with the IASB to try to make this as smooth a transition as we can hope for, understanding that it's still a transition nonetheless.”
The transition resource group will be a joint group, Siegel noted. “Both boards are sponsoring it, and we'll publish the names of the participants in the group in short order after we finalize a couple of last-minute logistical details. There will be members of all the different stakeholders—auditors, preparers, investors. There will be regulators who are observers at the meetings. There will be public meetings of this group. You can attend them, and we'll also webcast them. They will be co-located so they will be going on in Norwalk [FASB's headquarters in Connecticut] and London simultaneously.”
Siegel added that the group won’t issue new guidance on its own. “The premise of the group is to identify issues that are causing difficulties or diversity on how it's being implemented,” he said. “The group will educate the board and each other about the issue, about different kinds of interpretations and whether or not we think there's going to be diversity in practice, and whether that diversity is consistent with the objective of the revenue standard or whether it’s too much diversity, or there's lack of clarity that might require some additional standard setting. And any additional standard setting would be done by the boards or their respective task forces on emerging issues.”
Groups like the American Institute of CPAs and major accounting firms are expected to issue their own guidance on how to apply the new revenue recognition standard. “I anticipate that the AICPA and the big accounting firms are probably already working on their guidance,” said Siegel. “That’s certainly their prerogative and how they look at it. Our standard is going to be what's in the codification and that's going to be what's authoritative. And any issues that arise in implementation, that's what we're going to try to use the the transition resource group for.”
In addition to the transition resource group, FASB will be busy with other projects, including its remaining convergence projects with the IASB on financial instruments and leasing. However, it has backed away to some extent from the insurance contracts project.
“It's not the full-boat project that we were doing with the IASB, but we are continuing to work on making recognition and measurement improvements to long-duration contracts, and making disclosure improvements to short-duration contracts,” said Siegel. “We still have plenty of work to do on financial instruments, especially in impairment and we've been having meetings monthly with the IASB on leases.”
In addition, Siegel noted that FASB has also been considering the rest of its own agenda. “Back in January we had an agenda prioritization meeting where we walked through a large number of items that are currently on the agenda that maybe we aren't committing a whole lot of resources to, and we ended up removing a number of things from our agenda,” he said. “But we also added some things to our research agenda to look into.”
FASB has also been working on a simplification initiative, trying to reduce complexity in current GAAP without reducing “decision useful” information. The board has also been working with its sister organization, the Private Company Council, on issues that have an impact on privately held companies such as intangibles. “They're also reviewing and analyzing stock-based compensation as a potential agenda item for them,” said Siegel. “They're also giving us advice on some of our current and future agenda items, so we're still very busy with lots of different things on our agenda.”
On Thursday, June 5, 2014, at 10:00 a.m. EDT/3:00 p.m. BST, the IASB and the FASB will host a live, joint webcast, IN FOCUS: Revenue from Contracts with Customers. The one-hour webcast will feature IASB and FASB members and staff providing a high-level overview of the new standard, with the opportunity for participants to submit questions. Those interested in participating must register in advance. U.S. participants in the live webcast will be eligible for up to one continuing professional education credit.