The release of a highly anticipated financial reporting standard Wednesday marked a grand achievement in the effort to converge international accounting rules.
The US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released a standard on the recognition of revenue from contracts with customers that is designed to create greater comparability for financial statement users across industries and jurisdictions.
“The revenue recognition standard represents a milestone in our efforts to improve and converge one of the most important areas of financial reporting,” FASB Chairman Russell Golden said in a news release. “It will eliminate a major source of inconsistency in GAAP, which currently consists of numerous disparate, industry-specific pieces of revenue recognition guidance.”
The guidance will mark a big change for many companies in the United States, where it’s estimated that more than 200 pieces of literature create the series of industry-specific rules for revenue recognition. The new rules will create a more principles-based approach to revenue recognition than US companies are used to following.
Meanwhile, the new guidance is designed to add rigour to IFRS requirements that lacked sufficient detail, in the opinion of accounting standard-setters. The release brings to fruition a project that begin in 2008.
“The successful conclusion of this project is a major achievement for both boards,” IASB Chairman Hans Hoogervorst said in a news release. “Together, we have improved the revenue requirements of both IFRS and US GAAP, while managing to achieve a fully converged standard. Our attention now turns to ensuring a successful transition to these new requirements.”
Under the new standard, companies will recognise revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services.
Companies would recognise revenue through a five-step process:
- 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.
The standard also will require enhanced disclosures and provide more comprehensive guidance for transactions such as service revenue and contract modifications. Guidance for multiple-element arrangements also has been enhanced.
“It’s remarkable, frankly, that the GAAP that exists today doesn’t prescribe a whole lot in terms of disclosures,” FASB member Marc Siegel said. “… This will standardise a set of disclosures for companies to provide, including an objective for how to disaggregate or break out revenue in the footnotes.”
The standard will take effect for US public companies for annual reporting periods beginning after December 15th 2016, including interim reporting periods. For nonpublic companies in the US, the standard takes effect for annual reporting periods beginning after December 15th 2017 and interim and annual reporting periods thereafter.
Companies using IFRS will be required to apply the standard for reporting periods beginning on or after January 1st 2017. Early application is permitted for companies that use IFRS.
The boards have created a transition resource group to aid in implementation; more details about the group are expected in the coming days.
—Ken Tysiac (firstname.lastname@example.org) is a CGMA Magazine senior editor.