News highlights for January 2014

A converged financial reporting standard for revenue recognition moved closer to reality with an indication that FASB would vote in favor of a standard—and some late changes.

FASB directed its staff to draft a final revenue recognition standard that was expected to be submitted to the board in December for final approval. FASB members indicated by a 5–1 margin that they would vote in favor of the standard.

The International Accounting Standards Board (IASB) also voted to proceed with a ballot for the standard, which is expected to be issued during the first quarter of 2014.

The revenue project has been followed closely by companies worldwide.

“This is a major accomplishment that will greatly change how people think about perhaps the most important item in financial statements,” FASB member Tom Linsmeier said during the board meeting.

The final standard submitted for ballot will eliminate much of the industry- specific guidance in U.S. GAAP, and include a five-step process for revenue recognition:

• Step 1: Identify the contract with a customer.
• Step 2: Identify the separate performance obligations in the contract.
• Step 3: Determine the transaction price.
• Step 4: Allocate the transaction price to the separate performance obligationsin the contract.
• Step 5: Recognize revenue when (or as) the entity satisfies a performanceobligation.

The boards made a significant late change to the proposal during their last joint meeting on the project. They voted to tentatively approve a collectibility threshold that contracts must meet for revenue to be recognized. Entities would have to determine that collectibility is probable in order to recognize revenue.

This threshold would introduce slight divergence into the standard, because “probable” means “more likely than not” under IFRS, but means “likely to occur” under U.S. GAAP, as defined in FASB Accounting Standards Codification Topic 450, Contingencies.

“We’re not really coming together, are we, because we’re saying the same word, but we’re meaning something different, which concerns me,” IASB member Stephen Cooper said during the joint meeting.

According to the previous tentative decisions, the proposed standard would take effect for reporting periods beginning after Dec. 15, 2016 (FASB), or reporting periods beginning on or after Jan. 1, 2017 (IASB).

FASB and the IASB also made tentative decisions on the objective of the constraint on estimates of variable consideration. The boards voted to:

• Require an entity to include an estimate of variable consideration in the transaction price to the extent that it is probable (U.S. GAAP) or highly probable (IFRS) that a significant revenue reversal will not occur. A significant revenue reversal will occur if there is a significant downward adjustment on the amount of cumulative revenue recognized from that contract with that customer.
• Require an entity to update the estimated transaction price at each reporting date.
• Create an exception to the constraint guidance when an entity licenses intellectual property in which the consideration is in the form of a sales or usage-based royalty. In these cases, the entity shall include that consideration in the transaction price only when the subsequent sales or usage occurs.

The boards also voted to clarify the criteria for differentiating between licenses that provide a customer with access to the entity’s intellectual property as it exists at any given time, and licenses that provide a customer with a right to use the entity’s intellectual property at a point in time.

As the boards worked on late-stage changes, PCAOB member Jay Hanson said in a speech that auditing revenue will need to be an area of focus for PCAOB standard setting in the near future.

“It is my hope that the PCAOB will soon devote substantial resources to an audit standard project in this area, and that we will be able to issue a proposal on auditing revenue with sufficient lead time to allow new accounting and auditing standards to become effective at or around the same time,” Hanson said at the Brigham Young University Accountancy Alumni Conference in Provo, Utah.

Auditing revenue is not yet on the PCAOB’s standard-setting agenda. But Hanson said that in view of revenue’s significance, the PCAOB needs to consider the issue.

Updates on the revenue recognition project and information on the implementation of the new standard are available on the JofA revenue recognition page.