The new converged revenue recognition standard from the Financial Accounting Standards Board and the International Accounting Standards Board could have an impact on not only financial statement preparers, but on tax practitioners and auditors as well.
“It’s not just accountants who need to worry about this,” said Bloomberg BNA Tax & Accounting executive editor George Farrah in an interview Friday. “Tax people will need to know about it because you might have to change your accounting method for tax purposes, and you need to assess whether or not that’s going to have an impact. They also need to be aware of it for their transfer pricing policies. Their transfer pricing may have been based on revenue estimates. Those estimates need to be looked at to see if there is any impact on them.”
Farrah also pointed to requirements in the Securities and Exchange Commission’s Staff Accounting Bulletin 74 for disclosing the impact that recently issued accounting standards will have on the financial statements of a company when adopted in a future period.
“Right now you can get away with saying you don’t know the implication of this,” he said. “Even though the effective date for implementation of the new rule isn’t for a while, the closer you get to that, the more the SEC is going to demand that you disclose what your potential impact is going to be.”
Prabhakar Kalavacherla, a former member of the International Accounting Standards Board, said the new standard represents a “sterling example” of cooperation for the two boards, although he acknowledged that some small differences remain in disclosures, the date for early adoption and especially the collectability threshold.
“I would say the only real one would be the level of collectability,” he said at a Financial Executives International conference in New York on Monday on the revenue recognition standard. “Other than that, I personally feel that both boards worked together admirably to come together.”
Differences over interpretations of licensing revenue could emerge as a concern, however, Kalavacheria cautioned.
FASB member Larry Smith, speaking alongside Kalavacherla, also cited collectability and license revenue as concerns. “There is one major difference, although it’s not in the wording, and that is in collectability,” he said. “We both use the word probable,’ although probable under IFRS means something different than probable’ in the U.S. So there is a slight difference. When it comes to licenses, I would say that is probably one of the larger areas of initial disagreement among the boards and even within the FASB. There were five FASB members that were strongly in favor of recognized license revenue over time, and then there were two of us who were more supportive upfront. The IASB was in the clear majority in terms of recognizing revenue for licenses upfront. I’d say what we crafted in the standard is really a type of compromise to come up with what we think the majority of board members would feel comfortable with. That being said, I think licenses are going to be one of the areas where there will be a fairly significant amount of disagreement as to how to interpret what the standard says.”
Kalavacherla and Smith also discussed interpretations of the new standard that might arise with the Joint Transition Resource Group that has been set up by the IASB and FASB to oversee implementation issues that arise as companies adjust to the new standards (see FASB and IASB Form Joint Transition Group for Rev Rec).
“This group will not be setting standards,” said Smith. “They will be discussing issues. We’ll have minutes of those issues, and then for any implementation issues that the group feels are worthy of the boards to address to eliminate diversity in interpretation, the boards will then go through their normal agenda process to evaluate whether or not to add a project to address the issue. My hope would be that the boards would act in concert to address the issues together to make sure that we don’t start off with a converged standard and wind up getting a standard that is no longer converged.”
Kalavacherla agreed, but expressed some concern that not all IASB members will be participating in the transition group, although IASB advisors will be in the group. He is also worried that accountants might use the written minutes of the open meetings of the group as a form of GAAP. “I think there is a lot of nervousness in international circles about what this interpretation will turn into regarding the accounting,” said Kalavacherla, who is currently a partner in KPMG’s Audit Quality and Professional Practice group. “The minutes need to be very carefully done. Let us say that eight people in the group say they want to do it one way. If the minutes start documenting it that way, it will become credible GAAP, and I am extremely worried about creating credible GAAPs here. It has to be a good process and it cannot just be that if eight people voice something and, if there is no other guidance out there, it’s put into GAAP. That’s not the idea in setting up this transition group.”
“That also means that the practice, the firms and the preparers, etc., need to be disciplined in terms of how they use those minutes,” Smith added.
Kenneth Bement, director of financial reporting and corporate accounting at the defense contractor Raytheon, noted that the new revenue recognition standard contains many areas of significant judgment. Auditing firms will also need to be careful in adjusting to the new standard.
“This new standard, in my view, really exacerbates an area that’s been a frequent criticism of the PCAOB inspections,” said Marty Baumann chief auditor and director of professional standards at the Public Company Accounting Oversight Board. “When complex judgments and estimates come into play, PCAOB inspectors have found more areas they’re able to pick out.”
He pointed to aspects of the contract, multi-auditor arrangements, and revenue recognized over different periods. “There are a number of areas today that are challenging and will clearly be exacerbated by this standard, which requires judgments around these types of areas,” said Bauman. “Also, there are far greater disclosures required with respect to this new accounting standard. It’s come up many times at our Standing Advisory Group [meetings] that auditors do a great job of evaluating quantitative areas and presenting those to management, but when it comes to disclosures that are more qualitative, and trying to assess materiality, you don’t quite add those up the same way in the exceptions in the balance sheet and income statement. Auditing these disclosures will create a big challenge.”
John DeMelis, a partner at Ernst & Young, noted that EY will be leading a robust effort to educate its members on the new revenue recognition standards. PricewaterhouseCoopers partner Dan Finneran said PwC will be rolling out training on the new standard across the firm over the next 12 months.