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Revenue Standard’s 2017 Start Date Becomes a Cause for Concern

June 9, 2014

Companies that will have to adopt the FASB’s recently issued revenue recognition standard are worrying about meeting the standard’s 2017 effective date.The concerns are driven in part by the choices companies have for adopting what the standard-setter calls retrospective application.Financial reports filed in 2017 will have to show adjustments for 2015 and 2016 financial results to reflect the new accounting treatment.

Companies that will have to adopt the FASB’s recently issued revenue recognition standard are worried that they’ll face problems meeting the standard’s 2017 effective date.

“A lot of companies feel that, with that objective of having an orderly transition and consistent application of the standard, it’s just not possible given the timeline,” said Kenneth Bement, director of financial reporting and corporate accounting at Raytheon Co., during a June 5, 2014, meeting between the FASB and Financial Executives International’s (FEI) Committee on Corporate Reporting in Stamford, Connecticut.

Bement was part of an FEI working group that has been meeting quarterly for the past two-and-a-half years while the FASB worked on Accounting Standards Update (ASU) No. 2014-09,Revenue from Contracts with Customers.The standard was a joint effort with the IASB, which issued its version as IFRS 15,Revenue from Contracts with Customers.The group plans to continue meeting and split up into subcommittees to address specific concerns with the revenue standard.FEI members are also taking part in the Joint Transition Resource Group the boards formed shortly after issuing the standards.

Until 2011, Bement was the FASB staff member overseeing the revenue recognition project.

“We understand that people are wondering how they’re going to implement the statement,” FASB member Marc Siegel said. “That totally makes sense; it’s understandable with a standard that’s been out a week.”

The concerns about the effective date are driven in part by the option for companies to follow retrospective application.Financial reports filed in 2017 will have to show adjustments for 2015 and 2016 financial results to reflect the new accounting.Financial reporting systems and processes will have to be modified by early 2015, little more than seven months after the standard’s publication, in order to allow for the adjustments that will be reported in 2017.

Companies also have the option to make a simpler transition, using what is called a cumulative catch-up method.This would require businesses only to use the new revenue guidance for long-running contracts that exist as of the standard’s effective date. Businesses must disclose in 2017, however, what their revenue figure would have been under the old guidance, so investors can make year-over-year comparisons.

Bement said FEI members were largely supportive of the standards and the reporting examples the accounting boards included with the guidance.

The accounting boards, after years of work to finish the standards, are trying to deflect attempts to revise the guidance now that it’s been published.

“One of the things we discussed was preventing this from becoming an opportunity to reopen the standard,” said FASB member Thomas Linsmeier in reference to the Transition Resource Group. “We’ve talked about screening things that appear to be just complaints about conclusions from ever coming forward.It’s going to be very, very hard for us to figure out how to do this.”

FASB members have discussed placing tight limits on the advisory panel and permitting it to do no more than relay information and have no authority to reach formal conclusions.

“That might be the ideal, so that there’s not nocturnal guidance being written in the minutes” of the advisory panel’s meetings, Linsmeier said. “But I’m not sure we’re going to be able to be disciplined enough to be just in listening mode always.”

Siegel said the Transition Resource Group will be modeled somewhat on previous FASB panels formed to aid the adoption of major standards.In 1998, the accounting board set up the Derivatives Implementation Group to assist companies with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities,(Topic 815).The group was disbanded in 2006.

After the FASB published SFAS No. 157,Fair Value Measurement,(Topic 820), in 2006, it formed the Valuation Resource Group.The panel has also since been shut down.

Siegel added that if the board is satisfied with the work of the Transition Resource Group, similar panels may be formed to aid with other major standards.

Under the new standards, companies must follow five steps to come up with their final revenue figure.They must identify the contract, separate each promise contained in the contract, determine the transaction price, allocate the transaction price to the different pieces of the contract, and recognize revenue when or as the business completes the contract.

The process is expected to change accounting practices for many U.S. companies, particularly in industries like telecommunications, technology, media, and other businesses that had employed detailed, industry-specific standards.Companies will also have to write footnote disclosures that explain how they arrived at their revenue totals.