The defense contractor Raytheon wrote that accounting for performance obligations separately when goods or services are delivered at different times is impractical for highly customized and complex engineering, design, and manufacturing services. "Assigning value to portions of the arrangement is not meaningful, as each contract is unique and therefore each component of a contract is unique," Raytheon said in its comment letter.

It also claimed that the likely result will be inconsistent identification of performance obligations from company to company, "which is counter to one of the primary objectives" of the standards boards' revenue-recognition project.

Those comments may resonate with the standards boards. FASB's revenue-recognition project manager, Kenneth Bement, told CFO.com that Raytheon's arguments are "good stuff" and worthy of debate.

Another defense contractor, General Dynamics, urged the standards boards "to consider reducing the current revenue recognition framework to two or three models rather than just one, including a separate model for the long-term contracting environment."

Whether to expand beyond a single model "is certainly something we're interested in feedback on," Bement said. "Some board members, even though they support the model in the discussion paper, think the model works great for most contracts but not all."

Indeed, in addition to long-term construction projects, the discussion paper noted that consideration may be given as to whether the model will be viable for: recognizing revenue from long-term, fixed-price contracts for goods and services with volatile prices; contracts in which the outcome depends on specified uncertain future events; some derivative contracts; and some insurance contracts.

Bement also agreed that certain key concepts need sharper definition and more guidance. "The boards will have to decide what 'control' is and what 'transfer' is," he said. "The model is not complete, and even the parts that are complete are still just high-level principles and not the way a standard would be written."

But some of the commenters evidently didn't understand that, he suggested. "I think a lot of the criticism is coming from people who perhaps were expecting an exposure draft rather than a discussion paper and perhaps don't appreciate the level at which discussion papers are written."

Further, although "control" needs to be defined better, Bement said a number of commenters mistakenly assumed that the word refers to physical control or taking legal title. "What we're talking about is accounting ownership, which is not necessarily the same thing," he said.

FASB and IASB will next deliberate further steps on the project at a joint meeting on July 23 in London. Bement could not say when the boards might be ready to issue an exposure draft.

Telephone Troubles
Meanwhile, there are potential issues with long-term contracts other than those involving construction. Verizon, for example, wrote that attempting to recognize revenue according to the obligations of its customer contracts not only would be impracticable, it would materially affect its financial results.

The telecommunications company pointed to its customer base of almost 100 million, a large number of which are under contracts that include many combinations of billable items — equipment, activation, basic monthly service, texting, Internet access, data downloads, and many others.

"The information required to prepare accurate accounting entries [as contemplated in the discussion paper] would require changes to point-of-sale and billing systems, as well as related accounting and reporting systems, including the general ledger and a separate data warehouse," Verizon wrote.

Bement said Verizon's comments "are consistent with what we've been hearing from that whole industry." While he couldn't speak to the system changes that would arise from adopting a new revenue-recognition model, he added, "My view is that recognizing revenue as they bill their monthly services makes a lot of sense."

And Dell, the computer giant, noted that under software contracts, control or title generally does not transfer to the customer at all, but rather the customer has a contractual "right to use" the software. "The final model will need to carefully consider how software transactions and the elements of post contract customer support and upgrade rights will apply in the new model," Dell wrote in its comment letter.

Bement said, "That's a good one. I think the board needs to think more about it, about when the prima facie is intangible by nature. When does the customer receive these rights to use? Is it all at once? Over time? Does it depend, and if so, on what?"

The Survey Says
Most comments to initiatives by standards bodies and regulators take issue with something being proposed. However, there appears to be a fair amount of support for what FASB and IASB are trying to do with revenue recognition.

In an April survey by RevenueRecognition.com — a website sponsored by Softrax Corp., a provider of revenue-management software — 54% of 515 finance executives agreed that the contract-based approach outlined in the discussion paper would clarify the earnings process. Only 29% disagreed.

However, the level of resistance to a contract-based approach increased as the number of revenue arrangements offered increased. Respondents with seven or more different types of such arrangements were twice as likely to disagree with the approach as those with three or fewer.

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