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Companies Raise Questions About Revenue Standard’s Implementation

November 20, 2013

The FASB and IASB have completed deliberations on their long-awaited revenue recognition project and are poised to publish the standard in early 2014. The standard is scheduled to become effective in 2017, and businesses—and the standard-setters—believe many questions will arise in the next three years about implementing it.

The FASB and IASB may be ready to publish a sweeping revenue recognition standard, but their work to clear up questions about the forthcoming guidance isn’t over.

In the lead up to the 2017 effective date for the global standard, businesses expect to struggle with the accounting for license arrangements, contracts with multiple service components, and updating accounting for contracts with customers that may be decades old, some panelists said on November 18, 2013, at Financial Executives International’s Current Financial Reporting Issues Conference in New York.

Allan Cohen, senior vice president and controller at NBC Universal, said media and entertainment companies anticipate many challenges moving from rules-based, industry-specific guidance under current U.S. GAAP to a more principles-based standard that requires businesses to use judgment.

“This is very judgmental,” Cohen said. “Different companies will do different things, and there will be diversity in practice here. It will be somewhat difficult to work through this criteria.”

Cohen pointed to accounting for licenses of intellectual property as especially vexing. The FASB and IASB want revenue from some license arrangements to be recognized in an up-front lump sum, and others to be recognized in pieces over time, depending on the nature of the contract. Based upon the wording in the draft standard, drawing the line will be tough, he said.

He gave an example of a clothing vendor paying NBC Universal $5 million for the right to print “Despicable Me” minions on T-shirts. Under the draft standard, the movie company may not be able to immediately record the payment from the T-shirt vendor. If NBC expects to “undertake activities to significantly affect” the value of the intellectual property, such as releasing a movie sequel in the near future, the company would have to recognize revenue over time.

“It’s almost judgmental as to when you recognize revenue if you feel that the customer will reasonably expect that the entity will undertake activities,” he said.

Two panelists outlined other challenges in moving to the new reporting. Gregg Nelson, vice president of accounting policy and external reporting at IBM Corp., said his company had recently analyzed its contracts to determine how to account for them and expected it would not be easy to account for contracts with customers that contain multiple service arrangements. Russell Hodge, global controller for General Electric Co., said the transition to the new standard would be difficult for companies with decades-old contracts. The new standard calls for companies to restate old revenue figures under the new rules so analysts and investors can better compare results.

“We have contracts that might be 15-, 20-, 25-year contracts,” Hodge said. “As long as those contracts are still in existence as of the transition date, you’ve got to go back and effectively restate that contract.”

The FASB and IASB’s revenue recognition project is expected to usher in a major change in accounting for what is often considered the most important line in the financial statement.

The boards want to get rid of the more than 180 pieces of industry-specific revenue guidance in U.S. GAAP, strengthen the principles in IFRS, and come up with a single way for all companies to report revenue, making it easier for analysts to understand and compare the results of different types of businesses.

The boards in November 2011 released largely converged proposals, with the FASB’s Proposed Accounting Standards Update (ASU) No. 2011-230, Revenue from Contracts with Customers, and the IASB’s Exposure Draft (ED) No. 2011-6, Revenue from Contracts with Customers.

The crux of the draft standard is that businesses will report revenue in the amount they expect to receive. Businesses will follow five steps to determine the amount of revenue they recognize. Companies will identify the contract with the customer, identify the separate obligations embedded in the contract, determine the transaction price, break down the price by each contractual requirement, and recognize revenue as the contract’s requirements are satisfied.

The boards expect to publish the standard in 2014, with an effective date of 2017. The IASB plans to allow companies to adopt it earlier. The FASB is giving private companies until 2018 to adopt it.

“This is really the jewel in the crown of convergence,” IASB Chairman Hans Hoogervorst said earlier at the conference. “It’s a standard that every company uses. I’m very proud of it.”

To ensure that the standard continues to be converged in practice, the boards have agreed to establish a transition resource group with U.S. and international companies, auditors, and analysts. The meetings will be public, and the members will advise the FASB and IASB on application questions ahead of the standard’s effective date.