One size fits all will cause challenges for some
The overhaul of the revenue recognition accounting standard has been on the convergence agenda of the FASB and the IASB since 2002. When we first wrote about the protracted journey of this process two years ago, the final standard was hoped for by the end of 2012. At that time, a Discussion Paper and two Exposure Drafts had already been issued and debated extensively. Now at last, the final standard, Revenue from Contracts with Customers, is at hand.
The deliberate nature of the process has proved beneficial in providing sought after clarity and more specific criteria for making the determinations required by the standard. Respondents presented unique aspects of their contracts to enable further delineation of how the standard would be applied.
Considering that various aspects of revenue recognition have been addressed previously in over 100 pronouncements, the goal of "one standard fits all" has been a monumental undertaking, justifying the time taken. Though new definitions and terms of measurement will need to be considered in the standard's five step approach, some industries, such as software and construction are already used to dealing with the determination of multiple elements or phases in their revenue recognition models. Even so, some industries, such as telecommunications, questioned the benefit of a single standard over the value of industry-specific accounting. For example, sellers of cell phones bundled with service contracts will have to change their revenue recognition allocation practices from prior methods which they felt were a better fit.
Following is the fundamental crux of the new standard, as described in the introduction to the IFRS version:
"The core principle of this IFRS is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity shall apply all of the following steps:
(a) identify the contract with a customer;
(b) identify the separate performance obligations in the contract;
(c) determine the transaction price;
(d) allocate the transaction price to the separate performance obligations in the contract; and
(e) recognise revenue when (or as) the entity satisfies a performance obligation."
The IFRS and FASB versions parallel each other, varying only in minor technicalities. For instance, the required threshold for probable collectability of revenue is lower in the IFRS than the FAS. Also, the FAS does not permit early adoption, while the IFRS does. The effective date starts generally with the 2017 calendar year, with non-public companies having the option of waiting until 2018.
Some companies have expressed concern that the impact of the effective date comes even sooner than it appears, since those that decide to apply the desirable full retrospective transition need to start accumulating data at the start of 2015. Anticipating this and other challenges, with such major changes in the standard, the FASB and IASB have planned to form a Revenue Recognition Joint Transition Resource Group to assist with issues that arise.
Though much guidance and discussion are sure to follow in coming months and years, the attainment of this joint effort of the FASB and IASB is a major milestone in international cooperation.
The content of this article is intended for general information purposes only and should not be construed as a professional opinion on any specific facts or circumstances. Professional advice should be consulted with regard to specific application of the information on a case by case basis.
