Revenue Recognition a Top Concern

FASB's advisory group also cites pension accounting, a ''conceptual framework,'' financial performance reporting, and lease accounting.
Craig SchneiderOctober 31, 2005

For the fourth consecutive year, revenue recognition was considered the top issue that should be addressed by the Financial Accounting Standards Board, according to a survey of members of FASB’s advisory group.

The Financial Accounting Standards Advisory Council — established in 1973 concurrent with FASB, and comprising CEOs and CFOs as well as senior members of the accounting, academic, and analyst communities — collected responses from 27 of its 33 members.

Other issues cited by many of the council members included pension accounting; a complete “conceptual framework” that would connect different projects; financial performance reporting; and accounting for leases and other contractual obligations. Issues surrounding fair value and stock compensation arrangements also require FASB’s attention, according to the survey.

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Regarding revenue recognition, users of a company’s financial statements cannot assess its disclosures whether its policies are comparable with peers or are aggressive, maintained Gregory Jonas, managing director of Moody’s Investors Service, a council member cited in the survey. That uncertainty about revenue recognition policies makes it difficult to adjust financial statements for analytical purposes difficult, according to Jonas.

As for pension accounting, the sheer complexity of the current standards is ample justification, in the eyes of some council members, for this to be a FASB priority. “The current standard that allows for smoothing is confusing and obscures valuable economic information about earnings and the value of the assets and obligations of the defined benefit plan,” wrote Nellie Liang, the Federal Reserve Board’s assistant director in the division of research and statistics.

Council members also addressed simplifying the overall standard-setting process. Suggestions included more-aggressive “field testing” of proposed standards, giving additional weight to cost-benefit considerations, and using more examples to illustrate concepts.

Regarding the amount of implementation guidance that FASB provides, council members were all over the board. Some believe that the board issues too little guidance; others, too much; and some, just right.

Creating a separate set of accounting standards for private companies was shot down by nearly all FASAC respondents. The majority recommended that the issue be addressed on a case-by-case basis.