Accounting & Tax

Setting Revenue Recognition Standards

FASB's and IASB's basic guide for recognizing revenue will start with the fair value of an asset or a liability.
Stephen TaubMay 17, 2004

Global accounting standard setters are moving closer to crafting one set of comprehensive guidelines for how and when companies should report revenue, and have set the end of this year as a target date for publishing a draft, according to Reuters.

The proposals being discussed between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) would be one of the most sweeping accounting changes ever, Reuters observed.

FASB has identified 180 different standards that have been used to recognize revenue, noted the wire service. Citing Securities and Exchange Commission and independent research, Reuters also pointed out that improper revenue recognition has been the most widely cited reason that companies restate earnings.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

“This will actually set some standards, going beyond a conceptual framework,” Edward Nusbaum, chief executive of accounting firm Grant Thornton and a consultant to FASB on revenue recognition, told the wire service.

Reuters said that the approach being considered will allow investors to gauge a company’s revenue stream by looking at the changed values of assets and liabilities reported in the balance sheet, rather than looking at “revenues” in the income statement, as is done today.

Under this method, transactions would be recognized as positive revenue generators only if they increased assets or decreased liabilities. Companies would be required to specify the fair value, or latest market value, of the asset or liability on a given date, elaborated the wire service.

The upshot, stressed Reuters, is that the basic guide for recognizing revenue will start with the fair value of an asset or a liability. “People will have to comply with this principle instead of trying to engineer a transaction around (current) rules,” Marina Sletten, FASB’s revenue recognition project manager, told the wire service.

This is far from a done deal, Reuters cautioned, since FASB and IASB officials say they have yet to figure out the best approach to arrive at the fair values. “This is the most difficult part and we are still looking at this problem,” an IASB official said.