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Proposal to Offer Extension to Revenue Standard’s Effective Date

The FASB voted to release a proposal to offer an extra year for public companies and two years for private companies to comply with the revenue recognition standard published in May 2014. The effective date has been set for 2017, but many companies have told the FASB they need more time. All companies will have an option to voluntarily adopt the standard in 2017.

Bowing to repeated requests from U.S. companies and the SEC, the FASB on April 1, 2015, agreed to propose a one-year deferral of the new revenue recognition accounting standard.

The FASB agreed to issue the proposal for a 30-day comment period. If finalized, the extension will give public companies until 2018 to comply with the revenue standard. Private companies would be granted until 2019 for full-year financial statements. For financial statements covering periods less than a year, private companies would not have to comply with the standard until 2020.

If companies do not want or need the extra time, they can still adopt the standard as of the original 2017 effective date.

The FASB and IASB published the largely converged, wide-ranging standards via the FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers , and the IASB’s IFRS 15, Revenue from Contracts with Customers , in May 2014.

The FASB voted 4-3 for the delay. The three dissenting board members favored a two-year deferral for all companies.

“Typically I’d say, ‘Well, one more year ought to be enough.’ But in this case, given the volume of transactions that some of these companies have and the fact that revenue is so important, I don’t want us to be in a situation where companies are rushed, and the quality of information they produce from their efforts is not useful to users,” FASB member Daryl Buck said.

The majority, however, said one extra year for public companies was sufficient.

“I do agree we need to do a deferral,” FASB member Marc Siegel said. “I’m hopeful questions we’re getting and have gotten will be dwindling over next six months or so and hoping impact of any changes will also similarly be more narrow over time and also more helpful.”

The standards are the result of more than 12 years of work and are expected to usher in a major change for many companies, especially for those in the software, media, and telecommunications industries, which are used to the industry-specific revenue guidance in U.S. GAAP. The standards erase a total of about 180 pieces of individual guidance and establish a principles-based process by which companies can implement uniform accounting for what is considered one of the most important measurements of their financial performance.

Because of the breadth of the change and the importance of revenue in a financial statement, the FASB and IASB said they would give companies an unusually long lead time to adopt the standards. The boards initially intended to publish the standards in 2013, but the final standards weren’t available until May 2014.

The publication date became significant in light of the 2017 effective date. Most U.S. companies intended to revise their financial reporting systems so they could report adjusted revenue totals and income statements for 2015 and 2016 with their 2017 first-quarter filings. To accommodate that comparison, companies would have had to have been making entries into their financial reporting systems using the new accounting as of January 1, 2015. The delay in publishing the final standards meant there was barely seven months to make the systems changes for one of the most significant accounting standards in recent memory.

Many U.S. companies told the FASB the schedule was unrealistic. In addition, the FASB and IASB have been reviewing questions from the public about the standards and considering amendments that have to be proposed for public comment.

FASB member Harold Schroeder said it was impossible for companies to update their accounting systems and their internal controls when the standard was still in flux.

“I think we basically have frozen people in place until we put pencils down,” Schroeder said.

In the meantime, the IASB has yet to decide whether to allow more time for companies that report under IFRS. While the FASB heard many requests from U.S. companies, an IASB staff member said in March that only four companies asked the international board for an extension.

The difference between U.S. and international companies may have to do with the lack of industry-specific revenue accounting standards in IFRS. Foreign companies are more familiar with the principles-based accounting employed by the revenue standard, IASB officials have said. U.S. companies have come to rely heavily on industry-specific guidance in GAAP when reporting revenue, and for them, the changes are substantial.

The IASB says it will meet at the end of April to decide whether to allow companies more time. At the March meeting of the IASB’s Accounting Standards Advisory Forum, the panel of global accounting standard-setting bodies told the IASB that it was paramount that the FASB and IASB set the same effective dates.

Second proposal to offer changes to two parts of revenue standard

In addition to agreeing to a proposal to change the effective date, the FASB on April 1 also agreed to float a proposal to change two aspects of the revenue standard.

With a 5-2 vote, the board agreed to propose clarifying how businesses should account for licenses and how to determine the accounting for separate commitments, or performance obligations, companies make in customer contracts.

The board wants the comment period to end June 30 and would like the proposal to be issued with sufficient time for a 40-day comment period.

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