Update on Revenue Recognition—Joint Project of the FASB and IASB
Nearly four years after the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly published for public comment a Discussion Paper, Preliminary Views on Revenue Recognition in Contracts with Customers, deliberations are continuing towards the goal of a common revenue recognition standard. The latest Exposure Drafts, Revenue from Contracts with Customers and Revenue from Contracts with Customers—Proposed Amendments to the FASB Accounting Standards Codification, were published in November 2011 and January 2012, respectively, and were open for public comment until March 13, 2012.
The core principle of the Exposure Drafts is to "recognize revenue to depict the transfer of 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."
In order to accomplish that objective, the Exposure Drafts have consistently set forth the following five steps:
- Identify the contract(s) with the customer.
- Identify the separate performance obligations.
- Determine the transaction price.
- Allocate the transaction price.
- Recognize revenue when a performance obligation is satisfied.
While the initial Exposure Draft published in June 2010 generated nearly 1,000 comments, the latest resulted in approximately 350 comments. The reduction was attributed to the following refinements that were made to the exposure draft:
- The Board addressed construction industry concerns in regards to identifying separate performance obligations, specifically by adding criteria for determining performance obligations over time;
- Guidance was added on how to determine when a good or service is transferred over time;
- The proposed treatment for accounting for warranties was simplified; and
- Certain disclosure exemptions were provided to non-public entities.
However, many commonalities remained in those comments, mainly in the following areas: industry specific consideration; transition and disclosure; variable consideration; time value of money; transfer of control of goods; contract acquisition and fulfillment costs; allocation of transaction price; contract segmentation and combination; collectability; application to services; onerous performance obligations; identifying separate performance obligations, as well as the criteria for when performance obligations are satisfied over time. Further, some respondents felt the proposals were complex and not easily understood, requesting further field testing, implementation working groups and additional examples or application guidance.
At a July 2012 meeting of the Boards, decisions were reached to clarify the guidance on identifying separate performance obligations, as well as the criteria for when performance obligations are satisfied over time. The Board also agreed to remove the requirement to assess onerous performance obligations. Key issues highlighted that still required deliberation included the "reasonably assured" constraint on recognition of variable consideration, collectability, time value of money, contract combination and modification and overall disclosures and transition related to the new standard.
Further discussions at the most recent meeting of the Boards in October 2012 ranged from contract modifications to measuring progress toward complete satisfaction of a performance obligation. The Boards discussed use of methods such as units produced or units delivered and tentatively decided that these are appropriate methods.
The exposure draft as well as decisions reached remain tentative and are subject to change. The Boards are expected to issue a final standard in the first half of 2013.
In the meantime, companies can prepare for the new standard by reviewing current contracts in the proposed five-step model, considering IT system needs, applying the relative selling price model to their revenue and contemplating the changes throughout the business, including any potential impact on compensation plans.