Revenue recognition – are we there yet?
The IASB and FASB have finally released the much awaited new exposure draft on revenue. The boards have been generally responsive to feedback from the first exposure draft. Many of the changes will be welcomed by industry groups, users and preparers, especially the simplification of the proposals for collectability, warranties, licences and contract separation. But the question is: in solving one problem have they opened up others?
A number of significant changes respond directly to industry feedback − for example, more contracts will be accounted for as a single unit; more revenue will be recognised over time; and the recognition of revenue will be restricted when the consideration is variable. But as we have seen before, a good answer for one industry may be a concern for another. This is always a potential pitfall of a principles-based standard.
What do I think? A principles-based approach remains the best way to achieve consistency across industries and capital markets. Industry-specific guidance and rules should be limited. The boards will no doubt continue working to retain the core model principles under pressure from those various industries that did not get what they wanted in the re-deliberations.
The boards have asked for specific feedback on the more significant changes from the original exposure draft:
- Collectability – All amounts related to credit risk are now to be recorded in a line item adjacent to revenue. This is closer to current practice, although it affects gross margin.
- Services – There is no separate recognition model for services; instead, the proposals include criteria for determining when control transfers over time. The criteria could capture activities beyond those we would normally consider a service.
- Contingent consideration – Variable consideration is recognised as revenue only when management has enough predictive experience to make an estimate. This is likely to be an area of judgement for industries where contingent consideration arrangements are common and industry practices could emerge.
- Onerous performance obligations – This is now limited to performance obligations satisfied ‘over time’ and over more than one year. This is a step closer to current practice but remains controversial.
Will people limit their comments to these issues? The boards received nearly 1,000 letters on the last exposure draft, and we expect the same level of response this time around. And most will not be able to stop themselves commenting on everything – so we might be in for another long period of deliberation. There are already suggestions that the final standard might slip into 2013.
Remember that revenue falls at the bottom of the standards ‘waterfall’. The proposals scope out financial instruments, leases and insurance contracts. The revenue proposals and timing could be significantly affected by the changes in the leasing project. And when the standard is finished, the boards also have implementation issues to look forward to. Will the EITF and IC work through the issues together? There have been no significant problems from the joint business combination project so far, but revenue is more pervasive. Preparers should, wherever possible, test the proposals against real transactions to flush out implementation issues now.
I said that the ‘masses have spoken’ when describing the response rate during the last comment period. The question is ‘Will they speak again?’ I suspect so.