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Concerns Mount About Transition to Revenue Recognition Standard

The FASB and IASB may have to craft a clear response to the growing concerns companies have about the 2017 effective date of the recently issued revenue recognition standards. Companies are concerned about the effect the standards are expected to have on their financial reporting systems and reporting controls and have been asking the accounting boards for extra help and time as they prepare to implement them.

The FASB and IASB expect they’ll need to respond to the growing concerns companies have about the 2017 effective date of the recently issued revenue recognition standards.

The boards have scheduled the Transition Resource Group’s next meeting for October 31, 2014, and FASB Chairman Russell Golden told a September 11 meeting of the accounting board’s Financial Accounting Standards Advisory Council (FASAC) that he expects the effective date to be on the meeting agenda.

Jan Hauser, General Electric Co.’s chief accounting officer, said the effective date is a concern for multinationals like her company that have to gather data from numerous far-flung subsidiaries and reevaluate how they’ll measure revenue from long-term customer contracts.

The standards were published on May 28. The FASB’s version is Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, and the IASB’s IFRS 15, Revenue from Contracts with Customers. The landmark standards establish a uniform means for reporting revenue in U.S. GAAP and IFRS and are regarded as the most significant achievement from the 12 years the boards worked on their international convergence project. They’re also expected to trigger significant changes to financial reporting, and throughout much of the time the boards were writing the standards, companies and auditors asked the boards for help making the transition to the new accounting.

On June 4, a week after the standards were published, AT&T Inc. asked the FASB and IASB to delay the effective date because companies lost valuable time planning for the transition due to the boards’ delay in publishing the standards.

“The boards continued to make changes to the standard that have impacted our ability to finalize implementation plans and system requirements,” AT&T wrote. Since the AT&T letter, semiconductor equipment supplier Cadence Design Systems Inc., video content distributor Tivo Inc., and Verizon Communications Inc. also asked that the effective date be pushed back.

Technology companies and telecommunications services providers are expected to undergo significant changes, given that the detailed, industry-specific accounting they’ve used for years is being scrapped and replaced with a principles-based accounting standard that requires much more judgment.

The use of so-called principles-based accounting is behind much of the concern companies have expressed and prompted many of the requests to the boards to provide detailed guidance for implementing the changes.

It’s not clear how receptive FASB and IASB members will be to the requests for a delay. When the standards were issued, current and former board members said that while they were writing the standard, they felt that the 2017 effective date gave companies a long lead time. Some board members wanted an earlier effective date and may resist extending it.

“Some of the requests for delay came out two days after we issued the standard, and that doesn’t seem to be a request based on really thinking about the issues around implementation,” FASB member Thomas Linsmeier told the FASAC members. “In some circumstances in my time on the board, it’s felt like we had deferral requests that we have responded to, and the outcome has been that people just waited to start up later. What we really need to understand to make a quality decision is really what the challenges are around implementation.”

Still, board members recognize that the revenue standard poses some distinct problems. Lawrence Smith said the FASB, partly as a result of recent discussions with SEC and PCAOB staff, has been paying more attention to the challenges companies face in updating their financial reporting controls following the publication of new standards. The challenges are especially pronounced with the revenue standard.

“There’s an increasing amount of emphasis on the changes in internal controls and the potential cost to change those systems,” Smith said. “As a result, board members now think a little differently about those costs.”

For some auditors, a delayed effective date may be the safest course in that it will allow accounting firms and their clients time to resolve implementation questions.

“The worst thing we could have happen to the profession is to have diversity in the application,” said Lawrence Gray, a senior partner with EisnerAmper LLP in Iselin, New Jersey.

For more analysis of ASU No. 2014-09, please see the Accounting and Auditing Update Service [AAUS No. 2014-18] and the SEC Accounting and Reporting Update Service [SARU No. 2014-21] (June 2014): SPECIAL REPORT: Comprehensive Coverage of the New U.S. GAAP Revenue Recognition Requirements.

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