Rewriting Revenue Recognition

On December 19, 2008, the Financial Accounting Standards Board and the International Accounting Standards Board issued a Discussion Paper titled, Preliminary Views on Revenue Recognition in Contracts with Customers. The joint project was initiated to clarify principles for recognizing revenue. This project is a major step toward convergence of U.S. GAAP and IFRS and is expected to lead to a single standard for revenue recognition.

Today, revenue and gain recognition guidance comprises more than a hundred standards in the U.S. Many of the standards are industry specific and contain detailed and complex prescriptive guidance. In contrast, International Financial Reporting Standards offer just two standards, which provide limited guidance and can be difficult to apply, especially for transactions involving multiple components and multiple deliverables.

The Discussion Paper introduces a contract-based revenue recognition model. The proposed model would apply to contracts with customers. Revenue recognition would be driven by increases in an entity's net contract with a customer, defined by a combination of rights and obligations. Revenue is generated when an entity satisfies performance obligations. Satisfaction of performance obligations occurs when an entity transfers a promised asset (such as a good or a service) to a customer. Transfers occur when the customer obtains control of an asset.

The Discussion Paper highlights potential effects on current practice. Specific areas mentioned include revenue under construction-type contracts, warranty and other post delivery services, cost capitalization and multiple element arrangements. The new model could have a significant impact on contractors, software companies and other companies with exposure to the areas listed above.

Two problems with U.S. GAAP that a new standard would address include numerous standards that define the earnings process inconsistently and gaps in guidance. Guidance today is complex and voluminous. Having a general standard for revenue recognition as a foundation for all revenue accounting makes sense--especially to address gaps that exist in guidance.

One concern is replacing all of the existing industry specific guidance with a single general principle. Rules have evolved over the years to address many unique, industry-specific matters and this is a significant step away from these rules.

Is replacing existing guidance (including industry specific guidance) with a single revenue recognition standard the right direction to go?

Share your thoughts with your colleagues on this very important proposal. In addition, the AICPA is looking for volunteers to provide feedback to be included in a response letter on how the proposed revenue model will impact their business. For more information and to submit your name, visit http://volunteers.aicpa.org/.

- Paul Parks

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