A final global standard on what kinds of goods and services can be recognized as revenue in corporate financial statements is due this summer. The move should provide added clarity to CFOs and their staffs struggling with the existing accounting rules for recording sales. But for some industries the standard brings some implementation headaches. 

Before issuing the standard, the Financial Accounting Standards Board (FASB) plans to have one more joint meeting in May with the International Accounting Standards Board (IASB), according to FASB chair Leslie Seidman, speaking at a Baruch College conference last week.

The final revenue recognition standard will be effective December 15, 2016. Public companies that report their financial results in the calendar year have until the first quarter of 2017 to comply, said Seidman. Private companies that report quarterly will have a one-year deferral, and private companies that do not report quarterly will have a two-year deferral, she said.

The converged standard should remove the inconsistencies that exist in current revenue recognition accounting guidance in the United States and abroad. In theory, that should reduce the number of restatements. Companies now routinely use different accounting methods for the same revenue transactions, whether in accordance with international financial reporting standards (IFRS) or U.S. generally accepted accounting principles (GAAP).  

The new converged standard simplifies the process of determining transaction prices, includes guidance on the collection process, and redefines the accounting for customer contracts, such as conditions for when a contract actually exists. 

“The cost benefit analysis [of the proposed standard] is that the entities will not have to go back and restate contracts in prior periods, so you are only dealing with contracts that exist as of the transition date [to the new standard],” added Seidman. Previously, there was a concern by accounting firms and their clients that they would have to restate contracts.  

Still, a major difficulty in aligning GAAP with IFRS is the contrast between the latters’ broader, more principles-based approach to revenue recognition — which is hard to apply to complex transactions — and GAAP’s preponderance of industry-specific revenue requirements.

When the final revenue-recognition standard is published, it may not be easy for corporations to follow right away, since “there’s obviously going to be implementation issues” with the converged standard, said Paul Beswick, chief accountant at the Securities and Exchange Commission, at the Baruch conference.

The new standard provides examples of implementing certain kinds of sales, warranties and customer options, for example, but the guidelines could still be challenging for companies that have to change their established accounting practices or add new billing systems to adopt the standard.    

“For some industries, it’s going to be a costly effort to ‘systematize this,’” agreed Seidman.

 

Certain industries will have an easier time than others. For example, whether to account for the revenue stream related to licensing agreements on an upfront basis or over time has been a controversial area of the standard for companies in the movie and entertainment industries.

“With all of the industry guidance that’s out there and SEC guidance, it’s still a challenge to research revenue-recognition issues,” said Katherine Gill-Charest, controller of Viacom, speaking at the conference. Viacom has asked the boards to reconsider certain wording in the standard relating to programming licensing agreements. 

In a comment letter from March 2012, Gill-Charest noted that the proposed standard says that when an entity grants a customer a license to use intellectual property, those promised rights give rise to a performance obligation that the entity satisfies immediately. But, she said, “in contrast, providing a programming service is a performance obligation that is satisfied over time.” Even though the substance of both arrangements is the same, the revenue recognition pattern differs.  

Gill-Charest admits that more conformity needs to take place among firms and that a converged standard is needed. Companies that use licensing agreements have already developed their own industry-specific approaches to account for revenue streams, she said, but they are not consistently applied among firms. But she has doubts about how well the new standard will satisfy media and entertainment companies’ accounting issues. “I am not sure the [boards’ new revenue recognition] principles can replace the industry’s specific guidance,” she said.

Admitting there are differences of opinion over the accounting for license agreements, Seidman said that FASB and the IASB did try to accommodate all opinions but “somebody is going to have to change.”

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