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Problems Persist With Implementing Landmark Revenue Standards

As businesses prepare to implement the FASB and IASB’s sweeping new revenue recognition standards, many companies expect questions to continue emerging about the implementation process, even though the FASB and IASB have attempted to address the biggest issues involved with the necessary changes to financial reporting systems. The boards have not scheduled a new meeting of the special Transition Resource Group (TRG), which was set up to deal with questions about the revenue standards. But they want to keep it functioning and be prepared to respond to new questions that may arise as the 2018 effective date nears.

Although the FASB and IASB have settled most of the pressing questions with their landmark revenue recognition standards, businesses expect more issues to arise as they start to implement the new guidance.

This is in part because the rules are so different from current practice and because many businesses have yet to sit down and determine how to apply them, said panelists at Financial Executives International’s Conference on Current Financial Reporting Issues in New York on November 16, 2015.

“I don’t think it’s realistic to say we’ve identified and answered all the questions by an end date,” said KPMG LLP partner Paul Munter. “It’s either going to be new questions come up as people start backing in further into the surface, or [there are] new forms of business arrangements.”

In Munter’s view, continued operation of the FASB and IASB’s special Transition Resource Group (TRG) is important as the 2018 effective date for the revenue standards draws near. The group, which has met six times since the FASB and IASB published their joint standards in May 2014, currently has no new meetings scheduled for 2016 as the group and the standard-setters have settled or are in the process of settling most of the big questions. But FASB and IASB officials have said they plan to keep the group on active status, even if they do not formally schedule a new meeting in the near future.

“Having something like the TRG continue to function is very useful because it provides a transparent mechanism to get these questions that are going to continue to emerge out into the open,” Munter said.

Indeed, the boards have yet to finalize guidance on applying one of the trickier parts of the standard — accounting for licenses of intellectual property. The licenses can cover a wide range of transactions, from an entertainment outfit granting rights to a television station to air a sitcom to a software company allowing a business to download a certain number of copies of its application.

The standards, published in May 2014 as the FASB’s Accounting Standard Update (ASU) No. 2014-09, Revenue From Contracts With Customers, and the IASB’s IFRS 15, Revenue from Contracts with Customers, divide licenses into two categories: those with revenues to be recognized all at once versus those to be recognized in increments over time.

From the beginning, businesses had questions about making the distinction. The boards tried to answer some of the biggest questions about the treatment of licenses earlier this year with similarly worded proposed clarifications.

FASB practice fellow Scott Muir said on November 16 the FASB’s clarification attempts to draw the line by saying some licenses include ongoing activity or support to keep the license’s value. He gave the example of an athletic apparel company licensing a New York Knicks logo. The license depends on the Knicks playing games, which indicates ongoing activity. In contrast, a license to air a completed movie is one transaction, and an entertainment company’s rights to show the movie are not affected by whether the licensor continues to do anything.

“That is how we’re trying to clarify the guidance,” Muir said.

The fact that the implementation guidance still is not settled, however, is a point of contention for companies that must account for license revenue under the new standard.

The FASB and IASB also have different wording and slightly different approaches to clarify the guidance. In addition, each board released their proposals at different times. This makes it hard for businesses, auditors, and analysts to react to them and offer feedback, Munter said.

“The FASB proposal’s out at one point in time, and IASB’s not out yet, so how do you know which one is better? This being out of sequence makes it very difficult to make an organized response to the board if you’re trying to encourage them to maintain convergence,” he said.

As is the case with many FASB and IASB joint projects, the boards have had to respond to different business and regulatory pressures on either side of the Atlantic. That the FASB has offered more practical expedients than the IASB is a function of representing its constituents, said Muir.

“So which do you want? Do you convergence… or do you want the practical way to do it?” he said. “There’s s bound to be arguments for both. But that’s the struggle FASB has to weigh, and it’s important we don’t overlook that difficult decision has to be made.”

The FASB and IASB’s revenue recognition standards are the result of more than a decade of work between the two accounting boards and were dubbed the “crown jewel” of convergence by IASB Chairman Hans Hoogervorst when they were published.

The standards erase about 180 pieces of individual, industry-specific revenue guidance in U.S. GAAP and provide a five-step, principles-based process by which businesses must calculate the top line in their income statements. They add heft to the scant revenue guidance in IFRS. Because they represent such a significant change to current accounting, the boards have been responding to many questions about the standards before they become effective in 2018. Both boards have agreed to make changes to the standards to clear up some of the biggest questions raised by businesses and auditors.

The TRG has received more than 80 questions, of which more than 50 have been settled, Muir said. Most have not involved the need for standard-setting activity.

For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: GAAP Critical Issues — Revenue Recognition, also on Checkpoint.

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