U.S. and international accounting-standards setters are sending project leaders around the world to soothe any remaining qualms about proposed changes to revenue-recognition rules.
For the most part, companies now seem resigned to the changes. The first exposure brief on the matter, in late 2010, generated nearly 1,000 comment letters. “It was one of the most hotly debated exposure drafts in quite some time,” says Robert Bedwell, a partner at accounting firm Cherry, Bekaert & Holland. But the second exposure draft, issued last November in response to the debate, resulted in just 50 comment letters as of March 13, the deadline for comments.
Despite the small number of comments, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are moving ahead with what amounts to a grass-roots campaign to address any remaining misgivings about the proposed new standard, called “Revenue from Contracts with Customers.” Through what FASB project leader Kristin Bauer called “extensive outreach” during a recent webcast, the boards are using the current comment period not only to explain their intentions but also to track down any unintended consequences before issuing the final standard.
Under current rules, similar companies with similar transactions have ended up with very different results. The proposed standard is intended to prevent this. According to the exposure draft, a company would recognize revenue when “it satisfies a performance obligation by transferring a promised good or service to a customer,” which occurs “when the customer obtains control of that good or service.”
Some companies are already preparing for the changes, even though the earliest the new rules would apply would be for financial-statement filings starting January 1, 2015. “Companies that have complex or interrelated IT systems and accounting statements are already gearing up for this,” Bedwell says.
Not everyone needs to put many resources against the matter just yet. The construction industry, for example, “won’t have fundamental changes,” says Stephen Thompson, a partner in KPMG’s accounting advisory services practice. Ironically, nearly a third of the first round of comment letters were from construction companies. They worried that they would be limited to recognizing revenue only at the very end of a project, rather than during certain parts of it.
Under the latest proposal, some companies will be able to recognize revenue earlier than they do now, in certain circumstances, if they are “reasonably assured” when they deliver the first portion of a good or service that the project will continue and they will get paid again when the next good or service is due for delivery.
Not all companies may view booking revenue sooner as a benefit. Software companies, for example, have adjusted to waiting to book revenue on transactions for as long as two years after a transaction’s initiation. The new rule may cause changes in how those firms communicate with analysts and revisions to customer contracts. “This will create a lot of work for some companies,” Thompson says.
Some of the new feedback may result in further tweaks. For instance, the rulemakers have heard many questions about how a company is supposed to determine whether a good or service is “distinct” or “bundled,” which will result in different accounting treatments. “We are certainly aware that we could possibly clarify the explanation with perhaps another example or two,” says Glenn Brady, a senior technical manager for the IASB.
While some small word changes may be in store, followers of U.S. generally accepted accounting principles aren’t likely to see major revisions between this latest proposal and the final rule, which is expected at the end of this year or the first quarter of 2013.