Ken Tysiac
Sabine Vollmer

New revenue recognition standard will require preparers to adjust

Three standard-setting icons weigh in on the progress and implications of the proposed converged revenue recognition rules.

September 6, 2012
By Ken Tysiac and Sabine Vollmer

FASB and the International Accounting Standards Board (IASB) remain on track to release a converged standard on revenue recognition in the first half of 2013 despite the fact that the existing standards in U.S. GAAP and IFRS differ vastly in specificity.

Question-and-answer sessions with standard-setting icons Sir David Tweedie, Robert Herz, and Paul Cherry suggest the boards have overcome significant hurdles to arrive at a converged standard. The trio sat for the interviews after a panel discussion this spring at the AICPA office in New York.

“When we looked at these standards, the U.S. has some 200 recommendations for revenue recognition,” said Tweedie, former IASB chairman. “We had two standards, which were just pretty high-level. We needed more. You needed a lot less.”

The core principle of the converged revenue recognition model is that revenue should depict the transfer of promised goods or services to customers in an amount that the company expects it will be entitled to be paid for those goods and services.

To identify that amount, FASB and IASB proposed a five-step process:

  • Step 1: Identify the contract with a customer.

  • Step 2: Identify the separate performance obligations in the contract.

  • Step 3: Determine the transaction price.

  • Step 4: Allocate the transaction price to the separate performance obligations in the contract.

  • Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

A big hurdle is that, in the United States, industries are used to having their own specific guidance regarding revenue recognition, Tweedie said. In the health care sector, for instance, complex contractual relationships can involve multiple parties (patient, physician, hospital, and third-party payer), making it difficult to identify the contract with a customer.

Nonetheless, he said, health care and other industries around the world have managed to apply the current IASB guidance without difficulty.

“Everyone else has health care as well,” he said, “and you know, nobody else seems to be panicking. … And the real problem you’ve got is if you have revenue recognition rules for the health [care] industry, and then a different one for automotives or telecoms, there’s no theme to it at all. … Why don’t we just set a principle?”

Former FASB Chairman Robert Herz said revenue recognition is the largest, most important project the boards have undertaken together and it has been a model of the way standard setting ought to be done. He said the boards formed working groups with industry experts to learn what kind of guidance they would need.

Herz said the second exposure draft, which was released in November 2011, contained lots of examples.

“They’ve engaged many, many different industries and companies, taking the guidance as it exists and rolling through their revenue streams,” he said.

Still, Cherry considered revenue recognition as probably the single most challenging standard with respect to the appropriate amount of guidance for preparers. He suggested the principles of the converged standard could be field-tested, to see whether they are articulated in a way that is practical for different industries or whether they require more work.

“My expectation is that over the next few years, yes, we will see additional implementation guidance around that general revenue recognition standard,” Cherry said, “and maybe some of those examples will be industry specific.”

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Ken Tysiac and Sabine Vollmer are Journal of Accountancy senior editors.