Revenue recognition effective date gives time for systems changes

Businesses will have a longer-than-usual transition period between the issuance and the effective date of a new, converged revenue recognition standard.

Entities will be required to apply the new standard for reporting periods beginning on or after Jan. 1, 2017, according to a summary of board decisions posted on FASB’s website.

The decisions made at last week’s joint teleconference meeting of FASB and the International Accounting Standards Board (IASB) are tentative and subject to change, and become final only after a formal, written ballot.

The boards are in the closing stages of a project that began in 2008 and aims to create global comparability and eliminate some industry variability in how entities recognize revenue. FASB and IASB staff were directed to begin drafting the final standard, which is scheduled to be released by the middle of the year.

According to the current schedule, more than three years would elapse between the release of the standard and its effective date. The boards agreed that this unusual length of time is appropriate because of the impact of this project, which has the potential to significantly affect other financial statement line items.

Feedback received by the boards’ staff indicated that three years was the minimum amount of time necessary for companies to prepare their systems and processes to capture the information necessary for restatement for disclosures in the comparative period.

The boards tentatively decided that an entity could apply the new revenue standard retrospectively, including optional practical expedients. Delaying the effective date until reporting periods beginning on or after Jan. 1, 2017, gives those entities time to update their software systems and processes in order to capture data for comparatives. 

However, the boards tentatively decided that an entity could also elect an alternative transition method that would not require comparative years to be restated. That method would require an entity to recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings in the year of initial application.

Entities that elect the alternative transition method would provide additional disclosures in the year of initial application for the amount by which each financial statement line item is affected in the current year as a result of the entity’s applying the new revenue standard.

The boards tentatively agreed to prohibit early application of the standard; that decision marked an affirmation of FASB’s previous position and a reversal for the IASB based on their 2011 exposure drafts.

In addition, the boards made a number of tentative decisions on disclosures regarding:

• Disaggregation of revenue.
• Reconciliation of contract balances.
• Remaining performance obligations.
• Assets recognized from the costs to obtain or fulfill a contract with a customer.
• Onerous performance obligations.
• Qualitative information about performance obligations and significant judgments.

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