Revenue recognition – the masses have spoken
Some of the IASB’s projects aren’t seen to have broad applicability, while others seem to affect nearly everyone. I think it is safe to say that revenue recognition is a project that affects almost everyone.
The number of responses received by the IASB and FASB during the revenue exposure draft’s comment process suggests that constituents are enormously interested in this project. One might say that the masses have spoken.
When I last looked, the count was up to 970 comment letters. At PwC’s Meet the Experts event in November, Henry Rees of the IASB said he was shooting for 1,000 – he might still get there, even though the comment period has officially closed.
So what did all the letters to the Boards say? Not surprisingly, they said quite a bit, and there was a wide range of opinions. Reactions ranged from outright rejection to general approval with some suggestions for improvements. Most were in between these two extremes. So what were some of the common points to the Boards?
- Many support the overall objective of the project, with a minority questioning the need to revise current guidance.
- Many accept the recognition of revenue using a single principle based on transfer of control, but most note that the principle and supporting guidance needs to be improved.
Similar comments are made about the guidance on identification of performance obligations, something that will require considerable judgement; however, some industries, notably the construction industry, prefer to keep the current activities-based model for certain long-term contracts.
Common areas that respondents thought the Boards should reconsider include:
- Collectability – many disagree with the proposal to reduce revenue for credit risk and then reflect subsequent changes outside of revenue.
- Time value of money – most understand the theory but are worried about relevance in situations where there is no intention to finance on the part of either party.
- Variable consideration – most don’t agree with only using probability-weighted estimates but want the ability to use best estimate. This is consistent with comments the IASB received on its provisions proposals.
- Entities with royalty arrangements are concerned with estimating future royalties and the potential change in the timing of recognition of royalty arrangements.
- Warranties – the proposed model is too complicated; most prefer to keep current guidance.
My sense was that, taken as a whole, the comments suggest that the basic model is workable but the Board needs to revisit a few of specific areas and further develop or refine some of the principles.
I am curious if all of you felt the same way – particularly to the extent that you or your organisation did not submit comments to the Board.
Let us know your thoughts – is this a project on the right track with potential to be done by June 2011, or is the work that needs to be done too much in the given timeframe?