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Construction, Software Industry Protests Spur Revenue-Recognition Revise

The construction and software industries, along with many others, get accounting standard-setters to simplify their act.
David M. Katz, CFO.com | US
November 15, 2011

Protests from the construction, software, and other industries pushed accounting standard-setters to issue a new revenue-recognition proposal on Monday, according to the Financial Accounting Standards Board's manager of the project.

After FASB and the International Accounting Standards Board proposed a new revenue-recommendation standard in September 2010, the boards got nearly 1,000 responses from a plethora of industries, many of them protesting details that affected them individually, says Kenneth Bement, the U.S. board's revenue-recognition project manager.

About a third of the letters were from the construction industry, and the authors expressed a concern that under the 2010 proposal, participants in construction projects may not be able to recognize revenue over the course of a project but only at the very end, he adds.

The "core principle" of the revised proposed standard, according to a press release issued by the boards yesterday, "is the same as that of the 2010 exposure draft: that an entity would recogni[z]e revenue from contracts with customers when it transfers promised goods or services to the customer."

The amount of revenue recognized "would be the amount of consideration promised by the customer in exchange for the transferred goods or services," according to the boards.  Upon hearing from their constituencies, the boards set about refining that broad concept. The new exposure draft is open for comment until March 13, 2012.

"The primary concern about the last proposal is that there was not enough guidance to let people know when something is transferred over time, like a service, [that is] unlike a good, which is transferred at a certain point in time," Bement says. Representatives of the construction industry, in particular, were particularly concerned about losing their ability to recognize revenue on the basis of a project's completion. "A lot of people in the construction industry were concerned that there would only be revenue at the end of the contract upon completion, and that would not result in useful information for users and analysts," the project manager says. The new proposal clarifies "that for most construction contracts, there would be revenue [recognized] for some percentage on a completion basis," he notes.

The boards want to erase many detailed, industry-specific rules in favor of "a more general framework to think through those [detailed] situations," says Bement, noting that, in addition to construction, software would be a particular area that would see changes.  If the plan is enacted, software providers would be required to provide estimates, rather than exact figures, more frequently. 

Besides the software industry, a new provision would also affect the entertainment, media, and other industries that gain revenue via intellectual-property licenses. Most such respondents to the 2010 proposal disagreed with a proposed requirement that an entity make a distinction between an exclusive license and a nonexclusive license when the company recognizes revenue. They "believe that it is counterintuitive to have different patterns of revenue recognition depending on whether a license is exclusive," according to the new disclosure draft.  

"People overwhelmingly responded that you can slice exclusivity in so many different ways: by time, by geography, by distribution channel," that the distinction becomes meaningless, says Bement. "So the boards have done away with that exclusivity bright line and said that all licenses are transferred at a point in time — which I think will simplify things."




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