Standard-setters to propose clarifying revenue recognition guidance

The US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) decided Wednesday to propose clarifying certain areas of the converged revenue recognition standard that are causing implementation problems for some financial statement preparers.

The boards plan to explore possible clarifications to the standard’s guidance for licences of intellectual property and identifying performance obligations. The board’s staffs will draft proposals seeking feedback on the potential revisions.

When FASB and the IASB jointly issued the revenue recognition standard in May 2014, it was hailed as the crowning achievement of the boards’ efforts to work together to produce standards that are almost completely converged. The standard is more principles-based than the industry-specific guidance US preparers are accustomed to, and it was designed to promote comparability across jurisdictions and industries.

Implementation questions from numerous preparers led the boards’ joint transition resource group to ask the boards to consider additional standard-setting on certain issues. FASB Chairman Russell Golden said the joint transition resource group has been approached about more than 40 issues related to the standard, and more than 30 have not required the boards’ consideration.

But Golden said the boards need to act in situations where there would be widespread diversity in practice. “We should try to resolve the diversity,” he said.

The boards moved forward in an attempt to resolve that diversity Wednesday but came to different conclusions on the substance of some of the clarifying changes and revisions they plan to propose. The IASB generally was less open to changes than FASB and agreed to propose clarifications that were more limited in scope.

FASB also is considering changing the effective date to give preparers more time to change their systems and processes to implement the standard, but it will consider that issue at a later date. The IASB has said its preparers have not indicated a need for a delay in the effective date, but IASB member Patrick Finnegan said Wednesday that he believes a delay is inevitable.

“There’s going to be a delay in the effective date,” Finnegan said. “... If a company was going to apply this standard and restate three years and try to be ready … they’d have to know the answers to these questions on [January 1st 2015]. And they’re not going to know the answers. So it’s pretty obvious that there’s going to have to be a deferral in light of all these potential changes we’re talking about.”

Currently, the standard is scheduled to take effect for reporting periods beginning after December 15th 2016 for US public companies, or reporting periods beginning on or after January 1st 2017 for companies that use International Financial Reporting Standards (IFRS).

FASB and the IASB agreed to propose revisions to the implementation guidance about determining the nature of the entity’s promise in granting a licence of intellectual property. But they disagreed on the articulations they plan to propose to revise the guidance.

The boards’ transition resource group found that stakeholders had varied interpretations of the licences of intellectual property implementation guidance. The proposed revisions would seek to narrow that diversity.

FASB and the IASB agreed that a clarification should be issued, stating that an entity should not split a sales- or usage-based royalty into a portion subject to the royalties constraint and a portion not subject to the royalties constraint.

The boards also will propose revisions related to identifying performance obligations, with FASB members agreeing to propose more substantial changes than IASB members. Concerns that have been identified with respect to identifying performance obligations include:

  • The level at which promised goods or services are identified in a contract with a customer (i.e., whether entities should identify a significant number of additional promised goods or services under the new revenue standard that are not identified as deliverables under existing revenue guidance).
  • Determining whether promised goods and services are distinct.
  • Determining whether providing shipping and handling is a promised service in the contract or a fulfilment cost.

Ken Tysiac ( is a CGMA Magazine editorial director.