By Cydney Posner
FASB and the IASB have just issued for public comment a revised draft standard on recognition of revenue (and some related costs) from contracts with customers. The proposed standard converges the financial reporting requirements of IFRS and US GAAP.
FASB contends that the proposed standard would improve IFRS and US GAAP by providing a better framework, removing inconsistencies, improving comparability, simplifying preparation and requiring improved disclosure. The core principle of this revised proposed standard is that "an entity would recognise revenue from contracts with customers when it transfers promised goods or services to the customer. The amount of revenue recognised would be the amount of consideration promised by the customer in exchange for the transferred goods or services." However, the new draft simplified and clarified several aspects of the guidance in response to feedback received. For example, the new proposal adds guidance on how to determine when a product or service is transferred over time and simplifies the method for determining a transaction price (including collectability, time value of money and variable consideration). The exposure draft is open for comment until March 13, 2012.
What does any of that mean? As translated by the Wall Street Journal, the new draft standard "is meant to create a single, unified method by which companies book revenue, and to align a company's counting of revenue with the transactions that generate it—the company's transfers of products and services to its customers. That sounds basic and straightforward, but that isn't always the way it works under current rules. Sometimes a company must book revenue over time, because elements of its products are provided long after the initial purchase—repairs under warranty for a car or appliance, for instance, or upgrades on computer programs. Some industries, like software and construction, currently have their own special models for recognizing revenue. Those special models would be eliminated if the proposal is enacted. Many companies will be able to book revenue sooner, instead of drawing it out over time, but others will see the opposite—some revenue they currently book up front will have to be deferred. Companies would still recognize the same total amount of revenue over time, however."
The WSJ reports that concerns expressed in the almost 1,000 comment letters received on the proposal led to a substantial revision of the proposal and further delays in GAAP-IFRS convergence, originally planned for mid-2011. The SEC is supposed to decide by year end whether convergence is even a good idea for US companies.