Some disclosure requirements get dropped from landmark revenue standard

Despite pleas from investors to keep the revenue recognition standard intact, the FASB on October 19, 2016, agreed to amend one of the standard’s disclosure rules for certain transactions that are common in the technology, entertainment, and payment card processing industries.

The FASB affirmed the disclosure break, which it called a practical expedient, as it was outlined in a proposal it released in May with the issuance of Proposed Accounting Standards Update (ASU) No. 2016-240, Technical Corrections and Improvements to Update 2014-09; Revenue From Contracts With Customers (Topic 606).

The break would allow some companies to skip requirements to disclose the remaining performance obligations in a contract with a customer for transactions in which a business does not have to estimate what is called “variable consideration” — essentially, uncertainty about payments from customers — to record revenue. The break would apply only to sales-based or usage-based royalties for licenses of intellectual property and variable consideration allocated to a series of distinct goods or services.

FASB staff member Kramer Holle said the practical expedient would align the disclosure requirements in the standard with the recognition and measurement requirements.

“That is, the disclosure would not be required if the estimate is not required to estimate revenue,” Holle told the board.

A majority of the FASB agreed with this assessment, saying it was important for the recognition and disclosure requirements to match. Two FASB members, Harold Schroeder and Marc Siegel, dissented.

Schroeder said the provision to let certain companies skip the disclosure requirement would deprive investors and analysts of key information.

“I appreciate the operationality issues here, and I think we do need to consider those. But we also have a known hole — a major hole — in what investors said consistently what they need,” Schroeder said. “And we’re not providing that. We’re not providing them decision-useful information.”

Under the sweeping revenue standard, published in May 2014 as ASU No. 2014-09, Revenue From Contracts With Customers, businesses must disclose information about promises to customers that are incomplete or partially complete. The disclosures include the amount of money allocated to the unsatisfied performance obligations and either a numerical or narrative explanation about when the revenue can be recorded from the unfinished tasks.

The standard gave a break from these disclosures if the promises are part of a contract of one year or less or if the business has the right to payments from customers in an amount that “corresponds directly with the value to the customer.” After the standard’s publication, businesses and auditors told the FASB that the disclosures may be difficult in some circumstances with so-called “variable consideration,” such as when pricing is tied to a market index.

The FASB’s May proposal offered an additional break, or “practical expedient” to industries that voiced the loudest complaints. If a business used the disclosure exemption, it would have to include qualitative, or descriptive information about the nature of the performance obligation, the length of time left in the contract, and the money excluded from the numerical disclosure of the transaction price allocated to the remaining obligation.

When the FASB released the technical corrections proposal in May, Schroeder and Siegel dissented, as did Thomas Linsmeier, whose term on the accounting board ended in June.

In their joint dissent, the three board members said the exemption chipped away at information that investors and analysts find essential to understanding a business’s revenue stream. It also would force analysts to look at non-GAAP measures about “backlog,” which give information about a business’s remaining performance obligations.

FASB Vice Chairman James Kroeker said overall, the revenue standard will usher in many new, enhanced disclosures that will lend better insight into how companies calculate one of the most important figures in their financial statements.

Kroeker also said he viewed the disclosure exemption as a technical correction to make the disclosures consistent with the recognition guidance in the standard.

FASB member Lawrence Smith said he agreed with the disclosure exemption and urged the board to move forward. The 2018 date for public company implementation of the revenue standard is looming, as is the voluntary early adoption date of 2017.

“We issued the standard over two years ago. There comes a point in time where you’ve got to put the pencils down,” Smith said.

The revenue standard is considered one of the most important standards to emerge from the FASB and IASB’s long-running convergence effort. It was published alongside the IASB’s largely matching IFRS 15, Revenue From Contracts With Customers.

The standards get rid of about 180 pieces of industry-specific accounting guidance in U.S. GAAP and call for a five-step, principles-based model that applies to most businesses worldwide.

Former SEC Chief Accountant Lynn Turner said he was surprised that a majority of the FASB backed the disclosure break. One of the aims of the revenue standard was to improve U.S. GAAP’s disclosure rules for recognizing revenue.

The information about remaining performance obligations is important because it lends insight into when revenue can be recorded. Revenue cannot be recorded until all the obligations are settled.

“Let’s say you hire someone to paint your house, and they’ve got all the basic house painted but haven’t painted any of the trim around the windows, and you agree to pay them provided they painted the whole house, trim and everything,” Turner said. “It’s a legitimate concern that if they haven’t painted all the trim around the house that they’re not entitled to that money yet. That’s exactly what you’re talking about here.”

The FASB plans to publish the update to the revenue standard by the end of the year.

For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: U.S. GAAP — Revenue Recognition, also on Checkpoint.

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