On November 6 2013, the Financial Accounting Standards Board (FASB) voted to authorize its staff to prepare and issue the final draft of the revenue recognition standard. This vote constitutes the final phase of the joint project on revenue recognition between the FASB and its global counterpart, the International Accounting Standards Board (IASB). In a statement, FASB Chairman Russell G. Golden announced [1]:
“The FASB will issue a standard that both improves and substantially converges guidance on how revenue is recognized in financial statements… Today’s vote represents a major milestone in our 11-year effort to create greater comparability in an area of financial reporting that affects all industries”.
The FASB has been working on the project for several years and has published two preliminary versions of the standard in 2010 and 2011. Once the final draft is issued, it will be submitted to the FASB for approval and the final standard will be published as part of the FASB Accounting Standards Codification TM. The goal of the project is to develop a unified system of revenue recognition for all industries. It also moves the FASB and the IASB a step closer toward reconciling their standards. Currently, the most significant difference between the US GAAP and the International Financial Reporting Standards (IFRS) is the general approach. While the IFRS standards are based on basic accounting principles with limited application guidance, the US GAAP standards are based on elaborate rules with specific application directions. For revenue recognition, the IFRS provides two specific standards: IAS 18 Revenue and IAS 11 Construction Contracts. The US GAAP on the other hand, outlines several concepts and provides detailed standards for revenue recognition in different industries [2]. The table below summarizes the current differences between the GAAP and the IFRS guidelines for revenue recognition [3].
(click on table to enlarge)
In order to develop a unified set of standards for revenue recognition, the new FASB draft will [4]:
- Add guidance on how to determine when a good or service is transferred over time;
- Simplify the proposals on warranties;
- Simplify how an entity would determine a transaction price (including collectibility, time value of money, and variable consideration);
- Modify the scope of the onerous test to apply to long-term services only;
- Add a practical expedient that permits an entity to recognize as an expense costs of obtaining a contract (if one year or less);
- Provide exemption from some disclosures for non-public entities that apply US GAAP.
Finally, the FASB draft is expected to be issued during the first quarter of 2014. The standard should take effect for public companies in 2017, and for private companies in 2018.
Sources:
[1] FASB votes to move forward with final standard on revenue recognition. News Release 11/06/13. FASB website. Accessed 11/22/13.
[2] Rapoport M. FASB Votes to Move Ahead With Revenue-Recognition Plan; New Accounting Rule Could Be Finalized Next Year. Wall Street Journal (Online) issue 06 Nov 2013. Accessed 11/22/13.
http://online.wsj.com/news/articles/SB10001424052702304448204579182111497140526
[3] Bohusova, H. Revenue Recognition under US GAAP and IFRS. The Business Review, Cambridge Vol. 12 (2) 2009.
[4] IASB and FASB publish revised proposal for revenue recognition. News release 11/14/11. FASB website. Accessed 11/22/13
LAMA LTEIF.