Five Things You Need to Know About New Revenue Recognition Rules

By | 3 years ago

Knowing us, you can guess where we're going with this. We're not writing a how-to guide on the new revenue recognition rules, which brings us straight to our first thing you need to know: there are folks in the know available to walk you through it.

#1: A transition resource group is here to help

From the Journal of Accountancy:

A transition resource group, being created by FASB and the IASB, will provide some answers for preparers in interpreting the standard. But don’t look for the group to lay down prescriptive accounting guidance.

The group will field questions from preparers with the intent of directing them to answers that already can be found within the standard, [IASB Vice Chairman Ian] Mackintosh said. Questions that are not covered by the standard will be referred by the transition resource group back to FASB and the IASB.

Meetings will be held in public and available on the web to maximize the boards’ ability to educate the public. The boards expect the meetings to begin in July, and the members of the resource group are expected to be announced next week, according to [FASB Chairman Russell] Golden.

#2: A "converged" revenue recognition standard leaves the door wide open for cooperation between FASB and the IASB in the future

Second, you need to know that both FASB and the IASB are really excited about these rules not because they are totally into revenue (who isn't?) but because this means it is possible for both groups to work together toward the mythical unicorn called convergence. As anyone who has been following that saga for the last, oh, six years or so can tell you, this is HUGE.

IASB chair Hans Hoogervorst is especially excited, as evidenced by a speech he gave in Singapore shortly after the new standard was announced:

The new Revenue Standard replaces American standards that contain thousands of pages of application guidance and IFRS Standards that provide too little guidance. The fact that we managed to stay converged with our colleagues of the FASB is very important and we intend to stay converged in the future.

#3: It took six years to get here

Back in 2008, the Boards (that would be FASB and IASB, guys) released a discussion paper called Preliminary Views on Revenue Recognition in Contracts with Customers. The FASB version is here and the IASB version is here; you will note they're more or less the same except for differences in formatting due to the way those silly Europeans speak English. Well, that and the IASB's version has prettier graphics and a more pleasing font but that has nothing to do with revenue recognition.

#4: Companies can pick a transition method but they're going to have to pick soon

December 15, 2016 seems like a long way off but for companies that choose the full retrospective approach, they'll need to start dual reporting in 2015.

From CGMA Mag:

Companies have two options for transition in the standard, which takes effect for public companies for reporting periods beginning after December 15th 2016 (FASB, effectively January 1st 2017 for calendar-year entities) or reporting periods beginning on or after January 1st 2017 (International Accounting Standards Board). Nonpublic entities will have an additional year to adopt the new standard.

A full retrospective transition approach would require calendar-year companies to capture data for dual-reporting starting from the beginning of 2015. An alternative method would not require restatement of comparative years, but some detailed additional disclosures would be required, including disclosing in the first year of adoption what the revenue under the old guidance would have been, to give users some ability to compare.

Choosing a transition method will be one of the biggest decisions for companies to make, [Brian] Marshall [a Partner in McGladrey's National Accounting Standards Group] said.

“And they’re going to want to make that decision sooner rather than later,” he said, “because in a perfect world if you do go with a full retrospective approach, you would want to have a dual-reporting approach of sorts for what will be the prior periods in the year of adoption and not wait until 2016 and then say, ‘I’ve got to go back and adjust all my prior periods and gather that information.’ ”

#5: The important stuff is buried in the footnotes (naturally)

Quartz had a write up about the new rules the other day, the first line of which made us shudder:

Of all the accounting concepts, revenue seems like the simplest. When a customer pays you for a product, you record it as revenue.

Uh… yeah, maybe if you are an 8-year-old running a lemonade stand. But let's overlook that uninformed bit and check this part out instead:

In this thicket of accounting jargon, one thing caught Quartz’s eye. Among the new disclosure requirements introduced by the new regime, companies must reveal details on the pricing and timing of their “remaining performance obligations,” more commonly known as a backlog. Today this is mostly ad hoc and voluntary; the new standards will move this valuable forward-looking information into the audited, attested body of an earnings report (in a footnote, naturally.)

This is a subtle but “enormously important” change in the tone of a company’s accounts, Brian O’Donovan of KPMG tells Quartz:

Financial statements are largely about the past, but the reason people read them is to try to make predictions about the future. This shifts that balance. It feels qualitatively different.

Analysts often pepper executives with mundane questions about the sequencing of contracted sales on conference calls—now they can just look to the report for answers, leaving time to discuss more substantive matters (one would hope.) But this requires them to delve into a report’s footnotes, where the juiciest details about company performance increasingly reside. And so the world’s most important accounting bodies have provided yet more evidence that it pays to read the fine print.

SO, check the footnotes. The Journal of Accountancy has a good explainer on why this might actually be an improvement over current GAAP:

The standard also will require enhanced disclosures and provide more comprehensive guidance for transactions such as service revenue and contract modifications. Guidance for multiple-element arrangements also has been enhanced.

“It’s remarkable, frankly, that the GAAP that exists today doesn’t prescribe a whole lot in terms of disclosures,” FASB member Marc Siegel said. “… This will standardize a set of disclosures for companies to provide, including an objective for how to disaggregate or break out revenue in the footnotes.”

To summarize: hit up the transition group or your nearest happy-to-bill-you-by-the-hour accounting firm if you have questions, expect more announcements like this to change rules in the future, expect "the future" to be anywhere from six to a bazillion years from now, pick your reporting poison sooner rather than later, and don't forget to check those footnotes.

Got it? Good, now you're all caught up.

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