IRS asks for comments on accounting method changes for proposed revenue recognition standards

In Notice 2015-40, the IRS asked for comments on what effect the new proposed financial accounting revenue recognition standards issued by FASB and the International Accounting Standards Board (IASB) should have on taxpayers’ methods of accounting.

On May 28, 2014, FASB and the IASB announced new financial accounting standards for recognizing revenue (Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers (Topic 606), issued by FASB, and International Financial Reporting Standard 15, Revenue From Contracts With Customers, issued by the IASB). Both boards recently proposed delays in the effective dates of the new standards and possible amendments.

These new standards for timing income for financial accounting may affect the timing for tax accounting for many taxpayers. According to the IRS, the taxpayers that may be affected include those (1) using the percentage-of-completion method of accounting, (2) deriving income from the provision of services, (3) engaging in bill-and-hold transactions for the sale of goods, (4) accounting for sales and returns of goods, and (5) earning income from warranties.

According to commenters on the new standards, the software, entertainment, manufacturing, and construction industries may be particularly affected because the new standards may cause significant changes in the timing of income recognition for financial accounting purposes for these industries.

Under IRS rules, taxpayers must obtain the IRS’s permission to change their accounting method. The IRS is concerned that the proposed revenue recognition standards raise a number of issues, including whether the new standards will be permissible methods of accounting for federal tax purposes. It is also concerned about the types of accounting method changes that will be necessary to implement these new standards and whether existing procedures for obtaining IRS consent to these changes (i.e., Rev. Proc. 2015-13) will be adequate.

To assist with implementing the proposed standards, the IRS is requesting comments on issues that may arise in conforming the standards with the Code, even though the effective date of FASB’s new standard is several years away. The IRS is interested especially in the following conformance issues:

1. To what extent do the new standards deviate from the Sec. 451 requirement for accrual-method taxpayers to recognize income when the right to receive it is fixed? How do they affect income deferral?
2. What industry- and/or transaction-specific issues may require future IRS guidance to address the effects of the new standards?
3. What types of changes in methods of accounting do taxpayers anticipate requesting as a result of the standards?
4. Do taxpayers anticipate requesting changes in methods of accounting before the new standards are effective?
5. Should the new standards result in taxpayers’ being required to use the automatic consent accounting method change procedures or the advance consent procedures to obtain permission for a change in accounting methods, and why?
6. Which accounting method changes required under the new standards, if any, should be allowed using a cutoff method (meaning the change is only applied going forward) instead of a Sec. 481(a) adjustment, and why?
7. Will the IRS need to modify advance or automatic consent procedures or other procedural guidance and, if so, how?
8. What transition rules would taxpayers find helpful?
9. What related accounting method changes do taxpayers anticipate requesting that may appropriately be made on a single Form 3115, Application for Change in Accounting Method?

Comments can be mailed, emailed, or hand-delivered to the IRS on or before Sept. 16 to the addresses listed in the notice.   

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.