What is happening at the FASB and IASB on the topic of revenue recognition recently? In December 2008, in conjunction with their joint project on revenue recognition, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) both issued discussion papers titled “Preliminary Views on Revenue Recognition in Contracts with Customers”. Comments on the documents were due in June 2009 and the Boards are currently discussing the comments received.
Why is the Revenue Recognition Project Being Undertaken?
In the U.S., generally accepted accounting principles (GAAP) revenue recognition guidance includes many different revenue rules. Some of them are industry specific and can produce conflicting results for economically similar transactions. In International Financial Reporting Standards (IFRS), revenue recognition has two main standards – IFRS 18, Revenue; and IAS 11, Construction Contracts. Many users have noted that they are difficult to apply beyond simple transactions because they provide limited guidance for transactions involving multiple components or multiple deliverables.
The goal of the joint FASB and IASB revenue recognition project is to clarify the principles for recognizing revenue and to create a joint revenue recognition standard for US GAAP and IFRS that companies can apply consistently across various industries and transactions.
How Will This New Revenue Recognition Standard Impact Entities?
According to this publication, a revenue recognition standard would impact all entities (public, private, and not-for-profit) that have contracts with customers which is true. The Boards have not excluded any particular contracts with customers from the proposed revenue recognition model, but are considering whether the following contracts should be included:
- Financial instruments and some nonfinancial instrument contracts that otherwise would be in the scope of existing financial instrument guidance.
- Insurance contracts within the scope of FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises (and other related U.S GAAP), and IFRS 4, Insurance Contracts.
- Leasing contracts that are in the scope of FASB Statement No. 13, Accounting for Leases (and other related U.S. GAAP), and IAS 17, Leases.
What Are The Major Differences In The Preliminary Views Document Versus Current Rules?
According to the “Revenue Recognition FAQ published by FASB and IASB“; If adopted in its current form, revenue would be recognized based on satisfying a contract obligation based on changes in the balance sheet. In contrast, today’s approach to earning revenue is based on the income statement.
The proposed revenue recognition model in the Preliminary Views Document could have a significant accounting impact for several industries:
- Construction and Long-term Contracts. If not considered a continuous transfer of assets, revenue is not recognized until assets are transferred to the customer, as compared to recognizing revenue throughout the contract on a cost of completion method.
- Software and Multiple Deliverables. Revenue is recognized upon satisfaction of performance obligations that could result in earlier revenue recognition, as compared to situations that do not have sufficient vendor specific objective evidence of fair value. Members should be aware that this difference might not be as significant if EITF 08-1 and 09-3 [relating to a possible change in current accounting for revenue arrangements with multiple deliverables] are finalized prior to the completion of the revenue recognition project. Members can stay current on these EITF topics through the FASB Web site.
- Not-For-Profit. Revenue is recognized upon satisfaction of performance obligations, which could result in a change in revenue measurement for certain not-for-profit contracts. The extent of the change, however, depends on the specifics of the contract.
- Sales Incentives. Sales incentives are treated as performance obligations. Revenue is deferred until the obligations are satisfied, as compared to recognizing them as marketing expenses or other operating costs at the contract’s inception.
- Contract Origination Costs. Costs are expensed unless capitalizable in accordance with other standards (e.g., inventory and software development costs).
- Post-Delivery Services. Revenue related to services provided after delivery, such as warranties and incidental maintenance, is treated as performance obligations and the revenue is deferred until the obligations are satisfied. This is applicable for all post-delivery services, not just those separately priced.
- Agriculture. Revenue would only be recognized when there is a contract with a customer and when an entity has satisfied its obligations under the contract, as compared to recognizing revenue from an increase in the value of inventory even if there is no contract.
How Significant Of A Task Will It Be For You To Implement The New Standard?
The proposed revenue recognition principle would require greater separation of deliverables for most industries. Initially, this process could be a significant undertaking, since it would require the identification and accounting for multiple performance obligations within a single contract.
When Should You Start Paying Attention to This New Revenue Recognition Development?
The Revenue Recognition project has the potential to impact every company’s day-to-day accounting, and possibly the way they do business through contracts with customers. The Boards will be discussing the project at their upcoming joint meetings, and are planning to issue an exposure draft in the first half of 2010. You [especially if you a member] should stay current on the project and look for updates on the FASB Web site at http://www.fasb.org/revenue_recognition.shtml.
Source: FASB IASB Preliminary Views Document on Revenue Recognition Questions and Answers | Developed by the American Institute of Certified Public Accountants [Rewrite and re-organized by publisher of this site].
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