The Financial Accounting Standards Board’s recent set of proposed technical corrections to its revenue recognition standard are a sign that more companies are getting serious about implementing them.
FASB proposed four technical corrections and improvements this month after proposing another set of nine corrections and improvements in May of this year (see FASB Proposes Technical Corrections in Revenue Recognition Standard). FASB and the International Accounting Standards Board issued the standard in May 2014 and later delayed the effective date for one year to give companies more time to get ready. In the U.S., public companies will start implementing the new standard for annual reporting periods starting after Dec. 15, 2017, and private companies for annual reporting periods starting after Dec. 15, 2018.
The four most recent technical corrections relate to loan guarantee fees, contract assets versus receivables, refund liability, and advertising costs. One observer sees positive signs of progress, even though the fixes are relatively trivial ones.
“In the pronouncement itself the FASB correctly characterized them as very narrow corrections,” said Chris Wright, managing director of the finance remediation and reporting compliance group at the consulting firm Protiviti. “If you look at the substance of the four of them, they’re largely around clarifying nuances that suggest people are starting to dive into the details of the new standard and ask substantive questions. They’re noticing the differences between what GAAP is now and what it proposes to be and trying to line up their approach.”
One of the questions involves whether or not loan guarantee fees are meant to be within the scope of the standard or not. They aren’t.
“The language wasn’t clear,” said Wright. “The fact that the technical correction was issued suggests that people have spent some time reading the standard, trying to understand it, and are perhaps moving into the phase of their approach to the new standard where they’re starting to get granular about what the changes might be.”
He sees a similar trend with FASB’s proposed clarifications of whether something is cancellable or non-cancellable in recording a receivable, or whether a liability should be referred to as a refund liability or a contract liability. “Those are all nuances that are suggestive of a deeper dive by the preparer and issuer communities, which we view as a positive development,” said Wright. “However narrow the changes are, they suggest that companies are moving forward in a more substantive way with the process.”
The proposed clarification of contract receivable recording and the semantics around the liability name suggest to Wright that people who focus on accounting theory are diving into the new standard more deeply.
FASB also added back some language from its original guidance on the accrual of advertising costs.
“FASB was essentially reinstating some language that might have inadvertently been removed regarding co-op and shared costs in certain revenue transactions,” said Wright. “That suggests consumer products companies and retailers are perhaps looking at the standard, as well as the financial services industry that might have generated the first question around loan guarantee fees.”
The four proposed technical corrections and improvements are not related in any direct way, Wright pointed out. “All four are separate thoughts,” he said. “But the one unifying concept around them is that they appear to suggest that they are the kinds of questions that are being asked by people who are getting farther along in the process and headed toward what for them will hopefully be timely implementation of the new standard.”
He sees more companies working on finally implementing the new standard, going beyond the diagnostics stage. “Companies are finally in the throes of adopting this new standard and starting to craft their own company-specific policies so that they’re in a position to create procedures around those policies and adopt the new standard on time,” said Wright.
Even though FASB has been making technical corrections and improvements, Wright doubts the board will make the new standard more rules based, as opposed to the principles-based standards that FASB and the IASB aimed to create by trying to harmonize U.S. GAAP with International Financial Reporting Standards.
“There’s always been sort of a false premise that GAAP is rules based, and the international accounting standards are principles based,” said Wright. “They’re both principles based. U.S GAAP is as specific as it is because over time there have been questions which required clarification from the Emerging Issues Task Force, the AICPA with statements of position, FASB itself, and perhaps the Securities and Exchange Commission as it relates to the staff accounting bulletins. U.S. GAAP appears to be more rule-bound because of the additional clarification that has occurred over the last several decades, but largely in response to either questions from the issuers and preparers or questions from the folks who regulate. lf there is a natural evolution, it is possible that as this process progresses what is a set of principles that apply to all companies will have some clarification that may start to look like rules, although I would not characterize any of these four technical corrections as rules. They are in all four cases clarifications of scope or language or in one case reinstating what appears to have been inadvertently deleted in the first draft. While that’s a potential as companies adopt this and ask questions and get answers and guidance, in the instance of these four technical corrections and those that preceded them, we are still in the truly technical correction phase where it is a matter of cleanup and clarification.”