The Securities and Exchange Commission is encouraging the Financial Accounting Standards Board to give accountants a long transition period to adjust to the upcoming revenue recognition standards.
Paul Beswick, chief accountant in the SEC’s Office of the Chief Accountant, said at Baruch College’s Financial Reporting Conference in New York on Thursday that an implementation group and long transition period are needed for the new standards. FASB chair Leslie Seidman, who spoke alongside Beswick, said they plan to hold one more joint meeting this month with the International Accounting Standards Board to finalize the long-awaited converged standard for revenue recognition and would probably issue it this summer.
Seidman cautioned the attendees that summer doesn’t officially begin until June 21. Her term as FASB chair will end on June 30, and current FASB board member Russell Golden will succeed her in July (see Russell Golden to Chair FASB).
“We have one more joint meeting with the IASB scheduled in May to discuss some of what we call ‘sweep issues’ that have arisen out of the drafting process,” Seidman said. “After that we are planning to issue a final standard sometime this summer. Summer starts June 21. I’m hoping it will be as close to June 21 as possible.”
Beswick cautioned that the new principles-based standards will require careful monitoring, as they dispense with many of the complex rules and anti-abuse provisions of the earlier standards.
“When you put a new standard in place and you’re talking about the top line, there are obviously going to be implementation issues,” he said. “Leslie has talked about this, that there is going to be an implementation group to try to deal with those issues, and I think we can probably see some of them right now. When you’re going away from some of the more proscriptive guidance to more subjective, there’s going to have to be a discussion of people accepting different views and subjectivity. We’re supportive of where they are right now, and of the implementation process.”
Beswick is pleased that FASB will have a long transition period so they can work through some of the abuse prevention issues. “In this time period, we want to see how people are going to start thinking about some of these transactions, and if we need to beef stuff up through the implementation group to narrow potential abuse preventions, we’ll do that,” he said. “Ultimately if we need to leave it in place, we’ll leave it in place. It is what it is.”
The hope is that the revenue recognition rules will be simpler to follow and less complicated. Seidman was asked how thick a printout of the new standards would be, and she jokingly estimated about half an inch.
Mark LaMonte, managing director at Moody’s Investors Service, said he thought the revenue recognition standards would be helpful for investors. “With effective enforcement and good implementation guidance, I think this will make it easier for users to analyze revenues,” he said. “There are certain industries today where we just have to ignore the revenue number because it’s not reflective of economics and instead look to cash flows or changes in backlog. I think this will improve that and in many cases make revenue a more meaningful number to look at.”
Katherine Gill-Charest, a controller at the media giant Viacom, said on the same panel as Seidman, Beswick and LaMonte that there should be industry-specific guidance for movie studios, particularly for issues such as licensing revenue, in addition to the implementation guidance.
“When you replace that guidance with principles, it’s quite possible—and we’ve done it in some of these [FASB] outreach sessions—to have three movie studios in a room read the principles and each one of us come up with a different answer," she said. "We all agree our answers agree with the principles on how to recognize the revenue when you go to a movie theater and watch a movie. That just seems to us like such a basic fundamental revenue stream that today is well understood and logical, and tomorrow would not only be more complex in terms of assessment, but could actually result in very illogical answers and inconsistency, even if all of us would be willing to say this is my policy and we believe it’s in conformity with these principles.”
Seidman responded that there would be further information in the guidance in response to the outreach that FASB has conducted.
Next Steps with IFRS
She and Beswick also discussed the status of the long-awaited leasing and financial instruments convergence projects, which are further away from being finalized. Beswick acknowledged that he is frequently asked about what are the next steps with International Financial Reporting Standards and noted that the SEC has a new chairman, Mary Jo White.
“We’ve got a new chair and she’s working through her priorities,” he said. “If you think about trying to staff up an agency, in terms of getting the heads of key offices and divisions and dealing with some of the issues that need to be addressed, I wouldn’t read into anything in terms of whether IFRS is or isn’t a priority. I think there are just some things that need to get addressed first in terms of money market funds, cross-border filings, those sorts of things.”
He noted that the SEC staff finished its work plan after two and half years on how IFRS might be incorporated into the U.S. financial reporting system on July 13, 2012. “That’s notable for two reasons,” said Beswick. “First of all, it was Friday the 13th and it was [former SEC chief accountant] Jim Kroeker’s last day. I tend to joke that it’s what drove him out of the Commission.”
Summing up the final staff report on the IFRS work plan, Beswick observed, “Looking to the IASB had significant challenges. As we looked around the global market, almost every jurisdiction has some sort of mechanism to ensure suitability. I don’t think that should be lost on anybody. At times people would come in and say, ‘You’re trying to get rid of the FASB.’ At least in my view, any sort of decision that the Commission would make, the FASB would need to be integral to that in terms of education and making sure that it works in the U.S.”
The SEC staff heard in the feedback that FASB needs to stay heavily involved. “That’s not to say that there wouldn’t be benefits in taking the next step,” Beswick added. “The question is really going to be what is that next step and how big of a step are we going to take? That’s something the staff is continuing to study. We’re continuing to do outreach, meeting with preparers and auditors, continuing to explore these issues.”
He later noted that he was encouraged to hear from IASB chairman Hans Hoogervorst when he saw him at a recent meeting of the Monitoring Board of government financial regulators that he is committed to resolving issues, such as the recent difference of opinion with FASB over expected credit losses in the financial instruments convergence project.
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