In 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued the converged standard on the recognition of revenue from contracts with customers, which standardizes how companies should recognize revenue in financial statements under both US Generally Accepted Accounting Principles (GAAP) and IFRS.
Its introduction in 2014 was the result of 12 years labour, with the FASB having begun work on the standard back in 2002, and the IASB joining them in 2008. Implementation was, however, eventually delayed by both boards following complaints from companies that they would not be able to prepare sufficiently. Public companies, certain not-for-profit organizations, and certain employee benefit plans will now apply the new revenue standard to annual reporting periods as of Dec. 15, 2017, and interim reporting periods inside the year of adoption. It is allowed for these entities to adopt the standard at any time after the original effective date of Dec. 15, 2016, if they are prepared to do so. The standard can also be applied early to all interim reporting periods within the year of adoption.
All other entities will apply the standard to annual reporting periods beginning after Dec. 15, 2018, as well as interim reporting periods within annual reporting periods as of Dec. 15, 2019.
The FASB has now proposed changes to certain areas of its revenue recognition standard that are designed to improve guidance on collectibility, non-cash consideration, and completed contracts at transition in the new revenue recognition standard.
The board wrote in the exposure draft released last week that: ‘The board decided to add a project to its technical agenda to improve Topic 606 by reducing the risk of diversity in practice at initial application, and the cost and complexity of applying Topic 606 – both at transition and on an ongoing basis’.
The proposed changes affect only certain parts of the revenue recognition guidance that were pinpointed following questions put to the transition resource group - which was formed by FASB and the International Accounting Standards Board (IASB) in order to help the implementation of the new, converged standard.
The amendments FASB proposed on Wednesday would:
- Clarify the objective of the collectibility criterion in Step 1 of the standard, and add a new criterion to clarify when revenue would be recognized for a contract that fails to meet the criteria in Step 1.
- Specify that the measurement date for non-cash consideration is contract inception, and clarify that the variable consideration guidance in the standard applies only to variability resulting from reasons other than the form of the consideration.
- Clarify that in a completed contract for purposes of transition, all or substantially all of the revenue was recognized under legacy GAAP before the date of initial application. Accounting for elements of a contract that do not affect revenue under legacy GAAP would be irrelevant to the assessment of whether a contract is complete. Also an entity would be permitted to apply the modified retrospective transition approach either to all contracts or to completed contracts only.
The FASB noted in their amendments that they are not totally in sync with the IASB, however, saying: ‘The amendments in this proposed Update are not identical to those proposed by the IASB, and some are incremental to the amendments proposed by the IASB. The FASB expects that the amendments in this proposed Update would not result in financial reporting outcomes that are significantly different from those reported under IFRS for similar transactions.’
The FASB is seeking comments, which can be submitted at the board’s website, by November 16th.