FASB, IASB Revised Proposal on Revenue from Contracts with Customers
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are pulling up their sleeves to improve and converge the financial reporting requirements of International Financial Reporting Standards (IFRSs) and US General Accepted Accounting Principles (US GAAP) for revenue (and some related costs) from contracts with customers.
The regulators are requesting for public comment by March 13, 2012. The Boards’ first Exposure Draft on revenue recognition was issued in June 2010 (the 2010 Exposure Draft), and generated nearly 1,000 comment letters.
After analyzing the letters and input received during public roundtables and other outreach to stakeholders, the Boards revised many of the 2010 proposals. Given the importance of revenue recognition to financial reporting, the Boards decided to take the extra step of re-exposing the revised proposals for public
comment before issuing a final standard.
Revenue is an important number to users of financial reports in assessing a company’s performance and prospects. However, revenue recognition requirements in US GAAP differ from those in IFRSs, and many believe both are in need of improvement.
US GAAP has complex, detailed requirements for specific industries or transactions that can result in different accounting for transactions that are economically similar. IFRS has two main revenue recognition
standards that have limited implementation guidance and can be difficult to understand and apply. Overall, existing disclosures about revenue have been criticized by financial statement users and regulators who believe they are inadequate.
The Boards issued a Discussion Paper in 2008 that presented their initial proposals on when to recognize revenue. The Discussion Paper introduced the concepts of a contract containing performance obligations and that revenue is recognized when an entity satisfies its performance obligations by transferring control of goods or services to a customer. It also introduced a revenue recognition measurement approach based on an allocation of the transaction price. Respondents to the Discussion Paper generally supported the proposed recognition and measurement principles.
However, they expressed concern about the proposals to identify separate performance obligations only on the basis of the timing of transfer of the good or service to the customer. They were also concerned with the proposal on the use of the concept of control to determine when a good or service is transferred. Based on
feedback received, the Boards issued the 2010 Exposure Draft in June 2010.
In the 2010 Exposure Draft, the Boards established the core principle that a company should recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration expected to be exchanged for those goods or services.
Respondents to the 2010 Exposure Draft supported this core principle. Most respondents also generally
supported the Boards’ proposal for a comprehensive revenue recognition model for both US GAAP and IFRS. However, almost all respondents indicated a need for clarification on how the core principle would apply in practice, particularly with respect to the concept of control and its application to service and construction contracts and the principle of distinct goods or services for identifying separate performance obligations in a contract.
The Boards addressed the concerns related to the 2010 Exposure Draft by clarifying the proposals, adding guidance, or simplifying many of the proposals. In some cases, revisions have drawn from concepts in current
accounting requirements that are considered to be consistent with the core principle.
Although the revisions to the 2010 Exposure Draft do not necessitate re-exposure for public comment in accordance with the Boards’ due process procedures, the Boards decided to re-expose the proposals because
of the importance of the financial reporting of revenue to all entities and the Boards’ desire to avoid
unintended consequences arising from the final standard.
As proposed in the 2011 Exposure Draft, most private companies and not-for-profit organizations would be
granted exceptions from applying most of the proposed quantitative disclosure requirements. Not for-profit organizations would be granted an exception from having to apply the onerous performance obligation test for contracts that have been entered into primarily for charitable or social benefit purposes. Finally, the standard would become effective at least one year later for most private companies and not-for-profit
The Boards have acknowledged that companies will need sufficient lead time after the standard is approved to implement its provisions. Therefore, the final standard would be effective no sooner than for annual periods beginning after January 2015; as mentioned above, it would become effective at least one year later for most private companies and not-for-profit organizations.