The Financial Accounting Standards Board and the International Accounting Standards Board have published a discussion paper that takes a joint approach to solving some perplexing questions about the recognition of revenue.

The discussion paper is the latest step in a joint project that the two standard-setters have been working on as they continue to converge U.S. and international accounting standards. Revenue recognition requirements in U.S. generally accepted accounting principles differ from those in International Financial Reporting Standards and both are considered in need of improvement.

The requirements in U.S. GAAP comprise numerous standards. Many are industry-specific and some can produce conflicting results for economically similar transactions. Although IFRS contains fewer standards on revenue recognition, its two main standards have different principles and can be difficult to understand and apply beyond simple transactions.

"We believe that a single revenue model, applied consistently across various industries and countries, would greatly improve comparability of a key number in the financial statements," said IASB Chairman Sir David Tweedie (pictured) in a statement. "We haven't got all the answers yet, but we need to know whether we're heading in the right direction. If you want to influence the outcome of the project, now is the time to get involved."

The boards' objective is to improve the existing guidance in both IFRS and U.S. GAAP by developing a single revenue model that can be applied consistently regardless of industry. Applying the underlying principle proposed by the boards, a company would recognize revenue when it satisfies a performance obligation by transferring goods and services to a customer as contractually agreed.

That principle is similar to many existing requirements, and the boards expect that many transactions would remain unaffected by the proposals. However, clarifying that principle and applying it consistently to all contracts with customers would improve the comparability and understandability of revenue for users of financial statements.

"Revenue recognition guidance has become increasingly complex with scores of authoritative literature in U.S. GAAP," said FASB Chairman Robert Herz in a statement. "The boards' revenue recognition project aims to simplify existing guidance by providing clear principles for recognizing revenue across a variety of industries. This discussion paper is an important step toward achieving that aim."

The discussion paper explains the proposed model and its implications, and seeks views from interested parties to assist the boards in further developing that model into a draft standard for both IFRS and U.S. GAAP. The discussion paper is open for comment until June 12, 2009.

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