How revenue recognition divergence would affect preparers

By Maria L. Murphy, CPA

Susan Callahan was excited about working under internationally consistent accounting rules following the release of the new, converged revenue recognition standard in May 2014.

Callahan, a CPA who serves as director of Americas accounting and global accounting policy at Ford Motor Co., is applying a global standard to all of Ford’s international affiliates for the first time. She was enthusiastic about the prospect of simplification that would come from applying the standard consistently across all affiliates.

But as FASB and the International Accounting Standards Board (IASB) have addressed preparers’ implementation concerns, potential new areas of divergence have emerged with the standard. The boards have taken different approaches on some issues in the process of proposing changes and gathering feedback on ideas meant to make the standard clearer and implementation easier for preparers. And the potential for divergence between U.S. GAAP and IFRS has crept in as the IASB generally has agreed to propose fewer clarifications and changes than FASB.

The possibility of more differences has diminished some of Callahan’s enthusiasm for the standard. She said that if principles differ between U.S. GAAP and IFRS, companies will have to have different systems to account for a transaction multiple ways, at significant cost.

“The revenue standard affects the fundamental, day-to-day operations and recording of transactions,” she said. “When you are sending millions of transactions through systems, systems don’t exist to account for a single revenue transaction in multiple ways. You can’t do this accounting topside. Standard setters look at one transaction and take it through the process from  ‘cradle-to-grave,’ which is a good academic and conceptual process, but when you look at the volume of transactions that so many of us have to deal with on a daily basis, practically speaking it becomes a real challenge or near impossibility.”

The new converged standard will replace most of the current guidance on revenue recognition and will bring significant changes in accounting and disclosures in the United States and anywhere IFRS is used. When it was issued, the standard was almost completely converged. But implementation issues encountered by preparers have led to questions for the boards’ joint transition resource group, which deemed certain questions worthy of approaching the boards for possible additional standard setting.

Different approaches

At joint meetings in February and March, the boards took different approaches to proposing changes to the standard, raising questions about the extent of convergence that will exist by the time the standard takes effect. In addition, there is potential for a divergence in the effective date of the standard. FASB voted Wednesday to propose a one-year delay in the effective date of the standard. The IASB is expected to debate this issue later this month, but IASB officials said they have seen little demand for a deferral among their stakeholders.

Despite the differing approaches to these issues, Dusty Stallings, CPA, a partner in PwC LLP’s capital markets accounting and advisory services practice, said she believes the boards remain interested in maintaining convergence.

“The impact of the proposed revisions will vary depending on the industry and the nature of the revisions,” she said. “The FASB’s rearticulation of principles related to distinct performance obligations has broader implications, while other issues may have a smaller effect. If the boards accept some divergence, there is the risk that there is less impetus to remain converged on other issues.”

Although the boards may be coming up with different results, Stallings said their common objective is to address practical concerns upfront. She said FASB conducted extensive outreach to constituents before the recent meetings and that the feedback from constituents about the proposed changes is that they should help to make the standard more operational.

Meanwhile, Callahan finds some of the implementation issues being discussed at this stage interesting, as some of them had been raised during the drafting process. An example of an issue that significantly impacts the auto industry and had been discussed previously with the boards is the potential for inconsequential marketing incentives to be viewed as performance obligations. Nonetheless, she said the transition resource group was a necessity because the standard creates fundamental changes for so many industries that there had to be a forum to discuss issues.

“The problem is that so many issues are bubbling up that they can’t handle them in time for adoption,” Callahan said. “I don’t think there was an appreciation of practical issues in terms of timing. … So, they will likely continue to have meetings, and companies will do the best that they can.”

Callahan expects that—as was the case with the Derivatives Implementation Group following the release of FASB Statement No. 133 in 2000—specific revenue implementation issues will continue to be addressed and there will need to be a process for companies to discuss and modify their accounting as the standard evolves.

Callahan said that another very large challenge for multinational companies is that she is finding that accounting firms are not looking at all implementation issues consistently; they are not always agreeing with one another. Disagreement also may exist internally within large firms between U.S. and foreign affiliates.

Alignment a key on effective date

While FASB is moving in the direction of delaying the effective date, Callahan said that the IASB may not defer the effective date because its constituents are not requesting an extension the way U.S. GAAP preparers are.

“There are two different board approaches going on given the environments in the U.S. and abroad,” Callahan said. “Someone once told me, in the U.S., unless it is explicitly allowed, then it is forbidden. In other locations, unless it is specifically forbidden, it is allowed. The IASB is saying, ‘This is a principles-based standard, so think!’ ... In the U.S., where we are dealing with an environment with a fear of restatements, regulators, and shareholder lawsuits, and a different legal society than in many international locations, we want everything explicitly allowed.”

Gregg Nelson, the vice president of accounting policy and external reporting at IBM, said during a PwC webcast that FASB’s proposed delay would be welcomed by most financial statement preparers, but he added that global companies could lose the benefit of a deferral if they have to file earlier to meet IFRS requirements. FASB voted to propose an early adoption option, which would allow global companies to remain aligned if the IFRS decides against a deferral. But those companies would miss out on the benefits of a delay.

“It’s important in our view for the effective date to align such that multinational preparers have the ability to implement one time on a worldwide basis,” Nelson said.

After FASB voted to propose a delay, Nelson said IBM would maintain the pace of the implementation plan it originally put into place. He said that will ensure that the company maintains its momentum and will provide flexibility if it encounters implementation problems or the standard changes more in the future.

He encouraged other preparers to continue pushing forward with their implementation efforts even if the delay is approved.

“The implementation of the new revenue standard, as we all know, will represent a significant and complex effort for most entities,” Nelson said. “Even if you don’t expect a material change in your financial results, the new model likely will involve new processes, revised internal accounting policies, new control points, new disclosures, and likely new systems that you will be employing in your revenue accounting model.”

As FASB and the IASB continue to debate implementation issues that could have broad implications, preparers and auditors also will need to continue to watch the developments and the potential for diversity in practice between U.S. GAAP and IFRS. Callahan and Ford are marching forward, using a centralized implementation approach that they commenced a number of years ago in reviewing their accounting policies globally that will meet all regulatory requirements. Ford also continues to lead an informal industry group working to identify common issues and come up with consistent solutions under the new standard.

Stallings’ advice is that while the boards continue to work on finalizing the revenue standard, preparers should not wait and focus on the implementation areas that are pending but rather should continue to work on implementation issues that affect them. She suggests that preparers monitor the transition resource group meetings, which are public and available on the FASB and IASB websites, as they provide a good window into the boards’ thinking and areas where the standard may not be clear. She also recommends keeping current on developments by reading updates on the boards’ websites and thought leadership publications issued by accounting firms.

“Potential deferral of the effective date is not a reason to ‘put pencils down,’ ” she said. “Given the challenges of implementation, the best plan is to continue to work on the standard. Implementation takes time. Set up a steering committee, develop a project plan and timeline, and understand your contract terms.”

Ken Tysiac, a JofA editorial director, contributed to this report.

Maria L. Murphy ( ) is a freelance writer. She has worked in public accounting as an audit and technical review partner and as a national office director, in private industry in accounting and financial reporting roles, and, most recently, as the editor-in-chief of The CPA Journal.


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