Revenue recognition: Tips for challenging circumstances

By Ken Tysiac

Some financial statement preparers are struggling with application of FASB's revenue recognition guidance in certain areas, according to SEC officials speaking Monday at the AICPA & CIMA Conference on Current SEC and PCAOB Developments.

In particular, preparers are encountering difficulties applying principal-versus-agent guidance; identifying whether performance observations are separate or distinct; and determining consideration payable to a customer. The difficulties are common enough that SEC Deputy Chief Accountant John Vanosdall, CPA, said he expects FASB's post-implementation review process to result in some adjustments to the standard.

"The volume of these issues that still exist is an important indicator that there could be opportunities to enhance the guidance," Vanosdall said.

In the meantime, though, preparers must apply the current rules correctly. These tips shared by SEC officials may help with that process:

  • Understand the guidance and the facts. "In those situations where we ultimately object to a company's conclusion, I find it's often due to either a simple misunderstanding of the requirements of the guidance or really a failure to carefully consider all the specific facts and the substance of the arrangement," said Jonathan Wiggins, CPA, an SEC associate chief accountant.
  • Work through the five-step process. "Rather than starting the assessment with any preconceived notion of what the company does and who its customers are, a company should work through the framework and [FASB ASC Topic] 606, step by step," Wiggins said. "That lets them identify the nature of the company's promise and identify the customer."
  • Be prepared to make judgments. The revenue recognition standard is largely principles-based, so Wiggins said he expects companies to encounter issues that require significant judgments. "In the consultation process, we always take an approach of respecting well-reasoned and supported judgments that are grounded in the facts of the particular fact pattern, grounded in the relevant rules and the accounting principles, that also consider the usefulness and transparency of the resulting information provided to investors," Wiggins said.
  • Keep investors in mind. "A company's careful consideration of what is important to investors can really provide the appropriate context for the company to make those significant judgments and can also help the company determine how best to describe those significant judgments in their disclosures," Wiggins said.
  • Ask for help. FASB, the SEC, and other standard setters and regulators welcome questions about application. "I would highly encourage investors, preparers, auditors, and others to continue to engage with the standard setters and, without saying, [the SEC Office of the Chief Accountant]," Wiggins said.

Vanosdall said some of the most frequent topics on which the SEC receives consultations include revenue recognition, debt and equity, financial statement presentation, financial assets and derivatives, and consolidations.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.

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