On July 9, 2015, the Financial Accounting Standards Board (FASB) officially deferred implementation of the landmark global revenue recognition accounting standard by one year. The International Accounting Standards Board (IASB) is expected to follow suit, despite less resistance to the effective date of the new guidance from companies that follow International Financial Reporting Standards (IFRS).
Many Years in the Making
Revenue is considered one of the most important measures of a company’s financial health, and proper implementation of the standards is high on the FASB’s list of priorities. In May 2014, the FASB published Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, codified in Accounting Standards Codification (ASC) Topic 606. The standard was largely converged with IFRS 15, Revenue from Contracts with Customers, and is considered one of the most important standards the FASB has released in recent years.
The converged standards are the result of more than 12 years of work and are expected to usher in a major change for many companies. ASU 2014-09 replaces about 180 pieces of individual guidance under US generally accepted accounting principles (US GAAP) with a single principles-based model for recognizing revenue from customer contracts.
The original effective date for the converged guidance was January 1, 2017, for calendar-year public business entities. Early adoption wasn’t allowed for public companies. Private companies were given an extra year to implement the new rules, or they could opt to implement them at the same time as public business entities.
Unrealistic Implementation Schedule
To implement the new guidance, most US public business entities intended to revise their financial reporting systems so they could report adjusted revenue totals and income statements for 2015 and 2016 with their 2017 first-quarter filings. Private companies would have an additional year to do so. The presentation of two prior years of results isn’t required under the standard, but many investors and analysts favor it when looking at public business entities, because it helps them assess a company’s long-term performance. It’s customary for private companies, in contrast, to present comparative financial statements with just one prior year.
To accommodate such retrospective adoption, public business entities would have had to have been making entries into their financial reporting systems using the new accounting methodology as of January 1, 2015. A nine-month delay in publishing the final converged standards meant there were barely seven months to make the systems changes required for the new standard, one of the most significant accounting standards in recent history. As a result, many US companies told the FASB that the implementation schedule was unrealistic.
Approval of a One-Year Deferral
In late April, the FASB proposed delaying the new revenue recognition standard by one year to give companies more time to digest the changes. Three of the FASB’s seven members originally said that a one-year delay wasn’t enough time for companies to get ready. Instead, they favored a two-year delay.
The IASB also proposed a one-year delay. But the international board was less enthusiastic about deferring the implementation date and didn’t consider a two-year deferral in its proposal. The three IASB members who voted against proposing a one-year deferral said delaying the standard set a bad precedent and that the standard setters had given companies ample time to adopt it.
One reason the IASB received fewer complaints about implementing the new standard is that companies outside the United States generally are more familiar with the principles-based accounting employed by the new revenue standard. Conversely, US companies are accustomed to more prescriptive industry-specific revenue accounting guidance under GAAP.
Deferred Implementation Dates
Under the FASB’s extension, public business entities, certain employee benefit plans, and some not-for-profit organizations can wait until fiscal years that start after December 15, 2017, to apply the new revenue recognition standard. They’ll also apply the standards to the quarterly reports and other interim-period reports issued for that year.
Private companies would be required adopt the standard for annual financial statements for fiscal years that start after December 15, 2018. In addition, private companies would apply the standard to interim periods for fiscal years that start after December 15, 2019.
The FASB also gives all companies the option of adopting the standard on the original effective date.
More Amendments under Consideration
For companies that engage in contracts with customers, the converged standards call for sweeping changes to revenue, a fundamental barometer of companies’ financial health. The FASB and the IASB have been fielding numerous questions from the public about these standards, and they’re considering amendments to clarify various portions. Although these amendments won’t necessarily amount to a major rewrite of the standard, they could lead to some differences between GAAP and IFRS.
For many companies, implementing the new standard means revising accounting controls, processes, and systems, so don’t let the one-year deferral lull you into complacency, especially if you choose to provide a two- or three-year comparative financial statement presentation using retrospective application.
The American Institute of Certified Public Accountants (AICPA) formed 16 task forces in the following industries to help companies interpret and apply the new standards:
- Aerospace and defense
- Asset management
- Construction contractors
- Depository institutions
- Health care
- Oil and gas
- Power and utility
Each task force is expected to produce an industry-specific accounting guide on revenue recognition, including illustrative examples of how companies should apply the new guidance.
We’re monitoring the latest revenue reporting guidance and can help you report contract revenue in accordance with the accounting guidance prepared by your industry’s AICPA task force. For questions about the revenue recognition standard and what your organization should be doing now to prepare, contact your Moss Adams professional.