FASB, IASB Rev Up Transition Group as Rev Rec is Released

by Edith Orenstein

Earlier today, the FASB and IASB Boards released their final, converged standards on revenue recognition.

FASB’s standard, Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers, (Topic 606 in FASB’s Accounting Standards Codification), replaces former ASC Topic 605, Revenue Recognition. The effective date of FASB’s new rev rec standard is:

  • Annual reporting periods beginning after Dec. 15, 2016, including interim reporting periods therein, for public companies, and
  • Annual reporting periods beginning after Dec. 15, 2017, and interim and annual reporting periods thereafter, for nonpublic companies and organizations.
The IASB’s standard, issued as IFRS 15, is effective for reporting periods beginning on or after Jan. 1, 2017, with early application permitted.

Far-Reaching Scope

The new rev rec standard, as evidenced by its title – Revenue From Contracts With Customers - is based on a conceptual foundation that most, if not all revenue-generating arrangements are, in effect, contractual arrangements between two parties. The new standards state revenue should be recognized when (or as) the reporting organization satisfies related performance obligations or promises within that contract.

The standard calls for a five-step process for recognizing revenue:

  1. Identify the contract with a customer
  2. Identify the performance obligations (promises) in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations in the contract
  5. Recognize revenue when (or as) the reporting organization satisfies a performance obligation
Just how broad is the scope of this new rev rec standard?

“We are superseding all of the former (Accounting Standards Codification) Topic 605, which is all of revenue recognition today,” FASB Board Member Mark Siegel says.

Siegel says the following areas were scoped out of the new standard because there are existing projects that would address those topics:

  • Lessor revenue –leases project
  • Insurance premium revenue: Insurance project
  • Certain financial instruments revenue: If interest income, part of Financial Instruments
“Pretty much everything else is scoped in,” says Siegel. “The other important scope point I want to make sure people are aware of is this standard is entitled “Revenue From Contracts With Customers,” but it also gives recognition and measurement guidance for Gains from any Non-Financial Asset. For example, if I sell my desk, the gain would be calculated in accordance with this standard.”

Transition Resource Group to Address Implementation Issues

Concurrent with the release of the final rev rec standard, FASB and the IASB announced the formation of a joint Transition Resource Group (the TRG or the Group).

“We are committed to making as smooth a transition as we can, given it is revenue, topline, and we’ve set up the Transition Resource Group to help insure as smooth as possible a transition,” Siegel emphasizes. “The group will be comprised of preparers, auditors, investors, some regulators, observers to meetings, and those will be announced very soon in the future.

Siegel says the TRG will be a joint transition resource group with the IASB. Meetings will be open to public and webcast, and the meetings will be co-located. For example, participants in London and the U.S. will be able to interact via a video connection.

“On the question of what, if any ‘guidance’ the TRG would be issuing, Siegel replies, “The group will not be issuing guidance; the purpose of the group is to bring up issues people think will be a problem with implementation, and the group will be able to talk with those individuals whether or not the standard provides enough guidance. If not, what the diversity in practice might be, whether it might be horrible enough to deal with it in standard-setting, or if it is the kind of diversity that always might exist.

“It will be an educational type meeting. The FASB and IASB Boards will convene afterward to decide if additional standard-setting is necessary. The minutes of those meetings will be available.”

Will Transition Period Be Long Enough?

Some preparers have questioned whether there will be sufficient time to implement this new rev rec standard. by the FASB’s implementation date -- which for all intents and purposes (for calendar year, public companies) starts at the beginning of 2017.

“We are committed to as smooth a transition as we can,” Siegel says. “We are hopeful once the standard is out, and people have read the final words, they’ll find the standard helps them with implementation, and to the extent it doesn’t, that’s why we set up the TRG; but should all those things not be sufficient, if people bring to us legitimate issues that require more thought,” Siegel indicates the FASB would consider those issues.

What About Smaller Public Companies?

We asked whether the boards considered an extended effective date for smaller public companies.

“The two different effective dates we have, for public business entities, and those that are not public - to try to add additional delineations would be quite difficult for us to do; how would we scope ‘small’ public companies. Whether a small or large public company, we are hopeful the standard will apply.”

June 16 Conference in NYC

Learn more about the far-reaching new Rev Rec standard by attending FEI’s one-day conference: Revenue Recognition: Guidance, Changes, Implementation, on June 16 in New York City. The full-day conference, sponsored by EY, will provide an opportunity for preparers to understand the new requirements and business considerations as they put in place new policies and controls to be compliant with the standard.

» View agenda and register here.