Convergence Milestone: Revenue Recognition among Proposals Released as FASB, IASB Commit to New Timeline

By Lamoreaux, Matthew G.; Nilsen, Kim | Journal of Accountancy, August 2010 | Go to article overview

Convergence Milestone: Revenue Recognition among Proposals Released as FASB, IASB Commit to New Timeline


Lamoreaux, Matthew G., Nilsen, Kim, Journal of Accountancy


EXECUTIVE SUMMARY

* FASB and the IASB have completed the first of three expected rounds of releasing exposure drafts in their effort to converge U.S. GAAP and IFRS.

* The boards released a revised work plan that extended by six months their self-imposed June 2011 deadline for completing convergence projects. The new plan limits to four the number of significant or complex exposure drafts issued in any one quarter, with revenue recognition, financial instruments, the reporting of other comprehensive income and fair value measurement comprising the first round.

* The joint revenue recognition proposal is built around the principle that a company should recognize revenue when it transfers goods or services to a customer in the amount of consideration the company expects to receive from the customer.

* Under the proposal, a company would be required to account for all distinct goods or services, which could require it to separate a contract into different units of accounting from those identified in current practice. And collectability would affect how much revenue is recognized, rather than whether revenue is recognized.

* FASB separately issued an exposure draft intended to improve accounting for financial instruments. The IASB, which is releasing its own set of proposals on financial instruments, asked its constituents to comment on the FASB plan. The boards plan to jointly consider the comments received on both models.

* Under the FASB proposal, financial statements would incorporate both amortized cost and fair value information about financial instruments held for collection or payment of cash flows. It also aims at providing more timely information on anticipated credit losses to financial statement users.

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FASB and the IASB wrapped up the first of three rounds of issuing proposed standards in their final push toward U.S. GAAP-IFRS convergence, even as they gave themselves an extra six months to complete the ambitious project.

In what is potentially their most far-reaching joint proposal to date, the boards unanimously recommended an approach to revenue recognition that would create one standard across all industries and would require greater disclosures, among other changes.

The revenue recognition proposal came a month after FASB issued its own proposal on accounting for financial instruments. The two boards are currently pursuing their own approaches to financial instruments but have pledged to try to reconcile this fall.

The boards consider revenue recognition, financial instruments and two projects closely related to financial instruments--fair value measurement and the presentation of other comprehensive income--to be urgent projects in the larger IFRS-U.S. GAAP convergence effort, and they said they remain committed to completing them by their self-imposed June 2011 deadline. Other priority projects scheduled for June include insurance contracts, leases, consolidations and derecognition. But the boards extended their deadline to December 2011 for less-urgent projects on financial statement presentation and financial instruments with characteristics of equity.

REVENUE RECOGNITION

The proposed revenue recognition standard, released June 24, is designed to streamline accounting for revenue across industries and correct inconsistencies in existing standards and practices.

"I think it will make accountants' jobs easier when new types of business arrangements emerge because they'll have one standard to look to on how to recognize revenue for the arrangement," FASB board member Leslie Seidman said in a podcast outlining the proposed changes. In the U.S., revenue issues have been dealt with on an ad hoc basis over the years, creating a "very complex, inconsistent and incomplete set of standards," Seidman said. Meanwhile IFRS offers very little guidance on revenue recognition. …

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