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FINANCIAL REPORTING

AICPA: Revenue Recognition Proposal Impractical

 

By Matthew G. Lamoreaux
December 14, 2010

The AICPA’s Financial Reporting Executive Committee (FinREC) this week voiced extensive concerns with a joint FASB-IASB proposed standard on revenue recognition that is intended to apply across all industry sectors.

 

“We agree with the theoretical merit of many of the concepts included in the proposed standard,” FinREC said in its comment letter. “We also believe, however, that certain principles...may be neither practical nor operational for preparers and auditors to apply without undue cost.”

 

The core principle of the 170-page exposure draft “is 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,” according to an overview released by the boards in June.

 

The FinREC letter comments on each of the five steps the standard setters said should be used to apply the proposed standard.

 

Step 1: Identify the contracts with the customer. FinREC said that while it agrees with the proposed definition of a contract, it believes the governing principle for contract combinations, segmentation and modifications should be “based on the economics of the transaction and not solely on price considerations.” The comment letter elaborates on these concerns.

 

Step 2: Identify the separate performance obligations. After expressing support for the principle of a performance obligation, FinREC criticized the definitions and concepts used in the proposed guidance. “We believe the boards need to improve the proposed principle to ensure that a final separation principle is operative and results in accounting results that reflect the economics of the transactions across industries and contracts.”

 

Step 3: Determine the transaction price. FinREC said it agrees that revenue recognition should be based on an estimate of the overall transaction price when consideration is variable. But “the application of this principle...has several practical limitations that must be addressed.” These include allowing alternative estimation methods, limiting adjustments based on customer credit risk only to revenue, developing a framework for applying the time value of money and that consideration paid to a customer should be reflected as a reduction of the transaction price.

 

Step 4: Allocate the transaction price to the performance obligations. Here FinREC appeared to agree with the proposal, commenting only that, “We believe existing estimation methodologies will allow entities to derive the standalone selling prices where independently observable measures may not exist.”

 

Step 5: Recognize revenue when a performance obligation is satisfied. FinREC said additional guidance is necessary for determining when control transfers, especially for services and goods that transfer continuously to the customer. “We believe that for many contracts for which control transfers continuously, an input measure (for example, proportion of costs incurred) may be an appropriate and practical reflection of control transfer to the customer.”

 

FinREC listed several other concerns and made it clear that it would like to have another look at the standard before it is finalized. “We believe that based on the outcome of re-deliberation by the boards, re-exposure of the proposed standard should be strongly considered to ensure sufficient and appropriate due process has been provided to those impacted by the exposure draft.”

 

The suggestion that the proposal should be re-deliberated and re-exposed comes as FASB and the IASB are under pressure to complete the project by their self-imposed June 2011 deadline.

 

—Matthew G. Lamoreaux (mlamoreaux@aicpa.org) is a JofA senior editor.

 

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