Progress toward a converged financial reporting standard for revenue recognition continued Wednesday when the International Accounting Standards Board (IASB) indicated its intention to approve the standard.
The board’s staff now will prepare a ballot draft for a final vote. The US Financial Accounting Standards Board (FASB) also voted earlier this month to proceed to a ballot draft for the standard. Passage of the standard would represent one of the crowning achievements of the convergence process.
Revenue is considered one of the most important items in financial statements, and the standard is designed to create worldwide comparability – at least within a given industry – while eliminating voluminous, industry-specific guidance that exists in current US GAAP.
The final standard is scheduled to be released in the first quarter of 2014. It would take effect for reporting periods beginning after December 15th 2016 (FASB), or reporting periods beginning on or after January 1st 2017 (IASB).
The new standard would require entities to follow a five-step process for revenue recognition:
- Step 1: Identify the contract with a customer.
- Step 2: Identify the separate performance obligations in the contract.
- Step 3: Determine the transaction price.
- Step 4: Allocate the transaction price to the separate performance obligations in the contract.
- Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation.
Some late changes approved by the boards last month introduce slight divergence to the proposal. The boards voted to add a collectibility threshold, requiring that entities would have to determine that collectibility is probable in order to recognise revenue.
Because “probable” is defined slightly differently in IFRS and US GAAP, that change created a small amount of inconsistency between the FASB and IASB proposals. Nonetheless, the standard is considered to be substantially converged, and IASB members applauded heartily after deciding to move ahead with pre-ballot drafting.
—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.