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Proposed One-Year Delay of Revenue Standard to Move Forward

The IASB plans to propose in mid-May a one-year deferral of the landmark, global revenue recognition accounting standard. If approved, companies would have until 2018 to comply with the new standard. The decision follows the lead of the FASB, which earlier in April agreed to propose a one-year delay.

The IASB on April 28, 2015, followed a FASB decision and agreed to propose a one-year delay of the landmark, international revenue recognition accounting standard.

If finalized, companies would not have to comply with the new accounting regime until January 2018.

“I think, frankly, everybody underestimated how much work it was to do,” IASB member Gary Kabureck said of the standard.

The international board voted 11-3 to propose a delay. Earlier in April, the FASB also agreed to propose a one-year delay. Many companies and auditors told the IASB that because the standards are converged, it was important for the effective date to be the same both in the U.S. and overseas. Unlike the FASB, however, the IASB will not ask a question in its exposure draft about delaying the standard two years.

A FASB spokeswoman said the U.S. board wants to publish its proposal by the end of April.

The three dissenting IASB members said delaying the standard set a bad precedent and that the standard-setters had given companies ample time to adopt it.

“I worry we’re going to encourage people to send letters after all major projects, after the fact, saying, ‘Actually, I started thinking about this… and I need more time,'” IASB member Sue Lloyd said.

The proposal, which will be issued for a comment period of at least 30 days, attempts to address criticism that the IASB and FASB did not give companies enough lead time to adopt the standards when they were published in May 2014 as the IASB’s IFRS 15, Revenue From Contracts With Customers and the FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers . The original effective date was January 2017.

Revenue is considered one of the most important measures of a company’s financial health, and proper implementation of the standards is high on the accounting boards’ list of priorities. With a 2017 effective date, the boards thought they had given companies enough time to prepare their financial reporting systems.

Shortly after the standards were issued, companies said they needed more time, and several comment letters were submitted to the FASB throughout 2014 and into early 2015 asking for a delay. When the standard becomes effective, most companies want their income statements to show investors and analysts two prior years of revenue figures using the new accounting method. To compile this information, companies would have had to start making entries into their financial reporting systems using the new accounting as of January 1. The standards were published in May 2014, which gave companies seven months to make the systems changes for one of the most significant accounting standards in recent memory.

Many U.S. companies complained that the schedule was unrealistic. While the IASB fielded fewer overall complaints about the 2017 effective date, it received several requests from the telecommunications sector for more time, the IASB staff wrote in the meeting agenda papers.

James Schnurr, who became the SEC’s chief accountant last October, made several public statements that the boards should consider a delay not long after he assumed his post.

The standards erase the industry-by-industry revenue guidance in U.S. GAAP and call for a single, principles-based model for companies worldwide to calculate their revenues.

When they issued the standards, the FASB and IASB formed the Transition Resource Group to answer questions about the accounting changes. Some questions have led the boards to propose limited changes to clarify portions of the standards. The boards expect to release for public comment in the coming months some of the proposed changes.

That there are still unfinalized parts of standard made some IASB members favor a delay.

“There are all these elements of doubt in the system,” Kabureck said.

No clarity on collectibility

Also on April 28, the IASB voted 12-2 not to clarify a part of the standard that deals with the odds of a business collecting payments from customers.

Called the “collectibilty threshold,” the test requires that it be probable that a business will collect the money it is entitled to in exchange for the goods or services promised to a customer. If a transaction fails this assessment, the standards consider the contract nonexistent. The logic is that if a company has poor odds of collecting payments, it shouldn’t record revenue from the transaction.

Businesses have had questions about deals that fail the collectibility test but on which they continue to receive some form of payment from the customer. In such a situation, the business can only recognize the money it collects if it has no outstanding obligations to the customer and all, or substantially all, of the payments have been made and are nonrefundable. A business may also recognize revenue if the contract has been terminated, and the money is nonrefundable.

Companies also had questions about when a contract should be considered “terminated.” Some thought it should be when the business decides to stop providing goods or services once the customer stops paying. Others said it should be when the company stops pursuing payment.

The FASB in March decided to make changes to the wording to clarify the concept.

A majority of the IASB, however, said IFRS 15 was clear enough.

“I think practice would understand our principle,” IASB member Takatsugu Ochi said. “They can manage. So let’s see how the practice grows.”

IASB member Patrick Finnegan, who was in favor of an amendment to clarify the collectibility threshold, said it was one of the toughest issues for the FASB and IASB to settle while writing the standards, and it made sense that businesses and accountants had questions.

“In this area, the reason why I would like to add the guidance is because this is one of three issues we spent almost 24 months analyzing in advance of the standard,” Finnegan said, referring to collectibility, the notion of constraint, and accounting for licenses.