FASB, IASB keep time value of money in revenue recognition standard

Adjustments for the time value of money, which have generated some opposition from stakeholders, are likely to remain a part of the converged revenue recognition standard that is being jointly developed by FASB and the International Accounting Standards Board (IASB).

The boards last week tentatively affirmed a proposal in the 2011 exposure draft regarding the time value of money, according to an update posted on FASB’s site. The proposal states that if a contract with a customer has a significant financing component, the entity should adjust the amount of promised consideration for the effects of the time value of money.

Board decisions are tentative and do not become final until after a formal written ballot. The final revenue recognition standard, which has sparked interest because it applies to the top item on the financial statement, is scheduled to be released in the first half of 2013.

Inclusion of the time value of money in the revenue recognition standard has met with some opposition from the AICPA and some corporations because of complexity.

In a comment letter, the AICPA Financial Reporting Executive Committee opposed including the time value of money in the standard because, it said, practical challenges and costs would outweigh the benefits to users.

“In evaluating time value of money, an entity would also need to consider how it manages its overall net cash inflows and outflows in an arrangement in order to accurately reflect the time value of money,” the letter said. “This adds even further complexity.”

Comment letters from Boeing, General Motors, and Chrysler also advocated eliminating or modifying the time value of money requirement because of concerns that it has the potential to be misleading and creates operational challenges to implement.

With respect to the time value of money, other matters the boards tentatively decided included:

• Clarifying the application of the indicators in Paragraph 59 of the ED for determining whether a contract has a significant financing component. Paragraph 59 says factors for that determination include the amount of time between delivery and payment, an assessment whether the amount paid would differ substantially if paid in cash promptly, and the interest rates in the contract and prevailing markets.
• Clarifying that if the transfer of goods or services to a customer is at the discretion of the customer, the entity should not adjust advance payments for the effects of the time value of money.
• Retaining the proposed practical expedient that says an entity need not adjust the promised payment to reflect the time value of money if at contract inception the entity expects the time between payment by the customer and performance to be one year or less.
• Clarifying that the expedient should also apply to contracts of longer than one year if the period between performance and payment is one year or less.
• Clarifying that entities will not be precluded from presenting as revenue interest income that is recognized from contracts with a significant financing component.

FASB and the IASB also considered topics not related to the time value of money:

Constraining the cumulative amount of revenue recognized. The boards tentatively decided that an entity should evaluate whether to constrain the cumulative amount of revenue recognized if the amount the entity expects to be paid is variable. This decision was consistent with the 2011 ED. Examples of variable consideration include discounts, rebates, refunds, credits, incentives, performance bonuses, penalties, contingencies, price concessions, and other similar items. The boards also tentatively decided to clarify the meaning of “variable consideration” to indicate that the constraint should apply to a fixed price contract in which there is uncertainty about whether the entity would be entitled to that consideration after satisfying the related performance obligation.

Collectibility. The boards asked the staff to further analyze several approaches for accounting for customer credit risk and to discuss that analysis at a future meeting. The approach included in the 2011 ED states that if a contract with a customer does not include a significant financing component, the consideration promised by the customer should not be adjusted for the customer’s credit risk, and that any impairment loss arising from that contract should be presented as a separate line item adjacent to the revenue line item. 

Distribution networks. The boards also made tentative decisions with respect to arrangements in distribution networks when an entity such as a manufacturer may transfer control of a product to a customer who may be an intermediary such as a dealer or retailer.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.