The AICPA’s Financial Reporting Executive Committee (FinREC) is asking FASB and the International Accounting Standards Board (IASB) for further deliberation and consideration on their joint proposal on an accounting standard for revenue recognition from contracts with customers.
FinREC, in a letter to FASB and the IASB, expresses concern that certain concepts in the proposed standard are unclear, may be challenging to apply, or do not appear cost beneficial. FinREC supports the boards’ single revenue recognition model and wrote that FASB and the IASB have made considerable progress since their original exposure draft, but describes several specific concerns.
FinREC says there are practical challenges for retrospective application of the standard, particularly for long-term contracts, and recommended that the boards allow private companies the option of deferring the effective date for two years after the effective date for public companies.
The AICPA accounting standards team sent FASB a separate letter offering observations on the revenue proposal from the AICPA’s Health Care Expert Panel and Investment Companies Expert Panel.
The core principle of the proposed standard is that an entity would recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Tuesday was the final day of the comment period of the second ED of the standard.
In a telephone interview, FinREC Chair Richard Paul said the proposal’s treatment of onerous assessments and the time value of money in particular present the potential for significant implementation challenges.
FinREC wrote that the onerous assessment should start at the contract level unless the facts and circumstances indicate another level; the boards’ proposal would assess onerous losses at the performance obligation level.
“We think that situation might arise where an entity might enter into a loss leader situation where the overall contract would be profitable,” Paul said, “and from our perspective you should measure whether there is an onerous contract and not an onerous performance obligation. We think the test is set at too low a level.”
FinREC wrote that practical challenges and costs outweigh the benefits of adjusting the transaction price to reflect the time value of money when a contract includes a significant financing component.
“We think the guidance could be clarified and maybe refined a bit so that only those very significant financing transactions, or the transactions that have a significant financing component, are accounted for incorporating the time value of money,” Paul said.
Others have expressed concerns that the model doesn’t similarly adjust costs for the time value of money, and that this could distort operating results in areas such as supplier arrangements.
In addition, FinREC wrote that the proposed definition for when a promised asset has no alternative use appears broad and requires significant judgment to determine if an entity can practically redirect a promised asset to another customer.
FinREC agrees with the proposal that revenue should be recognized without consideration of customers' credit risk. However, in FinREC’s opinion, the requirement to present the impact of the credit risk on the face of the income statement is “too prescriptive.” FinREC suggests that entities should have the option of presenting the revenue net of the adjustment for credit risk on the face of the income statement, with the unadjusted revenue amounts in the footnotes to the financial statement or as proposed.
With regard to variable consideration, FinREC advises eliminating the term “reasonably assured” to determine when an entity’s experience is predictive because it is unclear that “reasonably assured” is intended to be a qualitative threshold rather than a specific quantitative threshold.
Mirroring concerns of other stakeholders, FinREC wrote that the proposal requires too many disclosures in both interim and annual financial statements, and that the volume of disclosures required could obscure useful information. In her “2012 Chairman’s Outlook on the FASB” webcast Monday, FASB Chairman Leslie Seidman said disclosure volume was a consistent concern of those who have been commenting on the proposal.
The Health Care Expert Panel’s observations include concerns that:
- The ED is unclear on whether or how health care entities should recognize revenue associated with services provided to indigent self-pay patients who do not qualify for charity care.
- Health care operations usually involve more parties than the traditional “buyer” and “seller,” and the provision of services may involve a network of contractual relationships between the patient, physician, hospital, and third-party payer. The panel wrote that the ED’s provisions around combining of contracts apparently did not contemplate the health care situation and are likely to be difficult for health care providers to interpret.
- Different continuing-care retirement communities may reach different conclusions on whether or how to apply the standard to contracts where a refund is contingent upon the receipt of a new entrance fee of a subsequent resident.
The Investment Companies Expert Panel requested that FASB more
clearly define the term “client” in an example addressing asset
management services. The panel described different outcomes that could
occur when a fee is paid by a fund out of fund assets to cover
distribution expenses and perhaps shareholder expenses. The panel
wrote that internationally the client may be considered to be an
investor rather than the fund, while in the United States the fund
usually is viewed as the client.
“The way revenue recognition works right now, it’s so industry specific, and it’s so disaggregated that it’s certainly going to be a challenge for folks as they try to adopt this new, single standard that applies to everyone,” Paul said. “The thing you’re going to hear about as this gets finalized is that some industries are struggling with the final standard more than others, just because the guidance they had was so specific in the past.”
—Ken Tysiac (
ktysiac@aicpa.org
) is a JofA senior editor.
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