Protests from the construction, software, and other industries pushed accounting-standards setters to issue a new revenue-recognition proposal last month, capping a contentious 14 months since the Financial Accounting Standards Board and the International Accounting Standards Board first proposed a new revenue-recognition rule in September 2010.
That initial proposal drew nearly 1,000 responses from a plethora of industries, many of them protesting details that would affect 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, expressing concern that participants in construction projects may not be able to recognize revenue over the course of a project but only at the very end.
The “core principle” of the revised proposed standard, according to a November 14 statement from both standards-setting bodies, “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.”
Up for reconsideration, however, is a potential refinement of the concept embedded in the clause that states that the amount of revenue recognized “would be the amount of consideration promised by the customer in exchange for the transferred goods or services.” The new exposure draft is open for comment until March 13, 2012.
“The primary concern about the [initial] proposal is that there was not enough guidance to let people know when something is transferred over time, like a service, [which is] unlike a good, which is transferred at a certain point in time,” Bement says. Representatives of the construction industry were particularly concerned about losing their ability to recognize revenue on the basis of a project’s completion. The new proposal clarifies “that for most construction contracts, there would be revenue [recognized] for some percentage on a completion basis,” Bement says.
The boards want to erase many detailed, industry-specific rules in favor of “a more general framework to think through those [detailed] situations,” Bement adds, 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 supply estimates, rather than exact figures, more frequently.
Another provision would affect the entertainment, media, and other industries that generate 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 newest 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.”