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FAF Proposes One-year Delay of Revenue Recognition Standard

Chris Gaetano
Published Date:
May 25, 2015

The Financial Accounting Foundation (FAF)—which houses both the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB)—issued a formal proposal on April 29 to delay the implementation of the new revenue recognition standard by one year for both public and private companies. 

The move was a response to stakeholders who said they needed more time to prepare for the new rules. As it stands, public entities are required to adopt the standard for reporting periods beginning after Dec. 15, 2016, while nonpublic entities must do so for annual reporting periods beginning on or after Dec. 15, 2017. If the FAF’s latest proposal passes, however, the new effective date will be reporting periods beginning after Dec. 15, 2017, for public entities, and Dec. 15, 2018, for nonpublic entities. In either case, entities are still allowed to adopt the standard early. 

Approved last May, the new revenue recognition model is the culmination of a years-long process between the FASB and the International Accounting Standards Board (IASB) to overhaul how revenue is recognized and recorded under U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The standard is part of the boards’ convergence project, which aims to produce comparable rules that can work in both systems. 

In GAAP, it discards the numerous industry-specific rules that had previously been used, in favor of a unitary model based on the recognition and fulfillment of contracts, which are divided into discrete performance obligations. Under the new standard, entities would identify the contract and the performance obligations within the contract, determine the overall transaction price, allocate that price to the individual performance obligations and recognize revenue when each performance obligation is completed.

Since it was first approved, the FASB has proposed several clarifications to better explain how the standard relates to areas such as the practical expedient and licensing, which financial statement preparers had trouble grappling with. At an FAF meeting last month, R. Harold Schroeder, a FASB board member, said that the need to produce so much clarifying guidance after the standard had been approved signified that it wasn’t ready for implementation, which was why he supported a delay. 

“It’s pretty easy for me to conclude [that] we ought to defer this thing,” he said. 

Another board member, Daryl E. Buck, noted that, in particular, the proposed guidance on how revenue recognition accounts for licensing agreements has been the cause of some concern for the entertainment, media and software industries, which all rely heavily on licensing for their revenue. 

“It very quickly became apparent to me that, at least for those companies in those industries,  being in a ready state to implement the standard, as of the effective date that currently exists, would be very difficult,” he said. 

Both FASB members also noted that stakeholders, too, were concerned about a lack of software solutions for dealing with the new standard. Schroeder said he doubted that vendors would be ready to provide such solutions by the current effective date. 

Charles Abraham, vice chair of the NYSSCPA’s SEC Committee, felt that delaying the standard’s implementation was the right call. At the moment, he said that many clients have begun reviewing what additional procedures and systems they’ll need, but are having difficulties interpreting what the guidance asks of them. The new standard is not as prescriptive, he added, and “clients have noted some gaps that need to be clarified.” 

“There are, of course, certain industries where the new standard will not have a material impact on revenue recognition,” he said. “However, with the need for further clarification, and the significant changes anticipated for other industries, in my view, it appears appropriate to defer the effective date.”

Fred  R. Goldstein, a member of the Society’s Financial Accounting Standards Committee, said that pushing back the effective date would be of most help to smaller issuers that don’t have the same resources as the larger players. This way, he said, they would have more time to observe what others—namely larger companies that may decide to implement early—are doing. 

Still, even though he felt that entities could benefit from a delay, Goldstein expressed some frustration that the standard’s implementation has dragged on for so long. 

“If this was so important to do, [then] ‘why is it taking so long’ is always the question,” he said. 

The FAF has asked stakeholders to submit comments about the proposal by May 29.

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