With the 2018 effective date for the new revenue recognition standards just 15 months away, companies need to start preparing for the sweeping changes as soon as possible, FASB and IASB officials said on September 15, 2016.
Speaking during a joint webcast about the new standard, FASB Vice Chairman James Kroeker and IASB member Mary Tokar said the boards were largely finished with revising the standards, and businesses should not expect significant changes to them.
“Both boards are clear that with the issuance of the key clarifying amendments earlier this year, the standard is stable, and entities should complete implementation with the confidence that the boards do not plan further changes,” Tokar said.
Published in May 2014 as the FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers and the IASB’s IFRS 15, Revenue From Contracts With Customers, the standards are the result of more than a decade of debate and decisions about how businesses and groups worldwide should report the top line in their income statements.
The standards are almost identical. IASB Chair Hans Hoogervorst has referred to them as the “crown jewel” of international accounting convergence. The standards replace reams of industry-specific guidance in U.S. GAAP and come up with a broad, principles-based way for almost all businesses worldwide to tally up revenues.
Public companies must comply with them in 2018, while private companies and not-for-profit groups have an extra year.
“The standards introduce a comprehensive framework for addressing revenue recognition questions when they arise, when business models change, when new products or services are developed, and when economic conditions fluctuate,” Kroeker said.
The standards offer a core principle to determine how and when to record revenues. Businesses and other groups must depict the transfer of goods or services to customers for the revenue they expect to collect.
The standards call for five steps to calculate the final number: identify the contract, identify the performance obligations, or promises, to fulfill the contract, determine the transaction price, allocate the transaction price to the promises in the contract, and, finally, recognize revenue once the performance obligation is satisfied.
The steps sound straightforward, but many questions about them cropped up after the standards were published. The boards formed a special joint panel of auditors, businesses, and analysts, called the Transition Resource Group (TRG), to respond to the questions and develop answers. The panel helped the FASB and IASB publish official clarifications to the standards, particularly for questions that have affected the telecommunications, entertainment, and pharmaceutical industries.
The FASB, which is beholden to U.S. stakeholders more accustomed to rules-based guidance than broad-based principles, has been more receptive to answering questions than the IASB. In addition, the SEC strongly urged the FASB to convene the TRG quickly after the standards were issued and then continued pressuring the standard-setters to present as many issues as possible to the panel. Still, throughout much of 2015, the urgency of the issues the TRG had to deal with tapered off.
In January, the IASB announced that it would cease formal participation of the group, while the FASB arm of the panel agreed to meet at least through the end of 2016.
The FASB’s April TRG meeting was relatively uneventful and concluded in less than the allotted time. Given a lack of issues that required resolution, the U.S. board cancelled the TRG meeting that had been planned for July, although it still reserves the option of meeting again if more questions arise.
There is only one issue on the agenda for the TRG meeting scheduled for November, Kroeker said.
“So we have to figure out, is it worth convening the meeting to talk about one issue, or is there another way to handle it?” he said.
The FASB’s decision to remain open for more decisions from the TRG while the IASB ends its formal participation in the meetings has raised questions about how the standards can remain converged if the boards are no longer fully cooperating.
“I want to assure people we are committed to the continued collaboration so that we achieve the objective of a converged standard,” Kroeker said.
Tokar said the IASB plans to keep the TRG intact even if it does not officially meet. She said the IASB also plans to continue to have representatives observe the FASB’s TRG discussions and report back to the full international board.
Tokar said the IASB and FASB staffs will still discuss issues submitted to the TRG and that the boards remained committed to keeping the standards converged.
For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.
We have partnered with Thomson Reuters to issue our monthly Accounting insights. Please feel free to contact Baker Tilly at firstname.lastname@example.org if you have any questions related to these articles or Baker Tilly's Accounting and Assurance Services. © 2016 Thomson Reuters/Tax & Accounting. All Rights Reserved.