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Boards Consult On Revenue Recognition Standard

by Glen Shapiro,, New York

18 November 2011

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have released for public comment a revised draft standard to improve and converge the financial reporting requirements of International Financial Reporting Standards (IFRS) and US Generally-Accepted Accounting Principles (GAAP) for revenue (and some related costs) from contracts with customers.

The boards decided to re-expose the proposals because of the importance of the financial reporting of revenue to all entities and the boards’ desire to avoid unintended consequences arising from the final standard.

The core principle of this revised proposed standard is the same as that of the 2010 exposure draft: that an entity would recognise revenue from contracts with customers when it transfers promised goods or services to the customer. The amount of revenue recognised would be the amount of consideration promised by the customer in exchange for the transferred goods or services.

However, in response to feedback received from nearly 1,000 comment letters on the 2010 exposure draft and extensive outreach activities, the boards further refined their original proposals. In particular the revised draft standard aims to:

  • Provide 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 recognise as an expense costs of obtaining a contract (if one year or less); and
  • Provide exemption from some disclosures for non-public entities that apply US GAAP.

If adopted, the proposed standard would replace IAS 18 Revenue, IAS 11 Construction Contracts and related Interpretations. In US GAAP, it would replace the guidance on revenue recognition in Topic 605 of the FASB Accounting Standards Codification.

Commenting on the exposure draft, Hans Hoogervorst, chairman of the IASB, said: “Revenue is the top line and it is important to every business. Our proposals will give analysts and investors the confidence that revenue is being presented on a consistent basis, across industries and continents.”

Leslie Seidman, chairman of the FASB, added: “This revised exposure draft on revenue recognition is based on the same underlying principles as the original draft, but we have simplified and clarified several aspects of the guidance in response to feedback we received. Because this proposed standard would affect companies across a wide range of industries, we are taking this additional quality control step to ensure that the final standard is well understood by companies, auditors and investors before it is issued as a final standard.”

Seidman added: “We plan to conduct additional outreach with interested parties during the comment period to help people understand the proposed guidance and to listen to any remaining concerns.”

The exposure draft is open for comment until March 13, 2012.

TAGS: generally accepted accounting principles (GAAP) | business | law | accounting | audit | International Accounting Standards Board (IASB) | international financial reporting standards (IFRS) | financial reporting | Financial Accounting Standards Board (FASB) | standards

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