FASB, IASB Plod Toward Convergence on Revenue

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					 Accounting & Auditing

FASB, IASB Plod Toward Convergence on Revenue
By Colleen Cunningham                          based on a balance sheet approach. This        control.
Compliance Week Columnist                      contrasts with the existing model, which          What constitutes a transfer of control,
                                               is more of an income statement, or earn-       precisely? The proposal isn’t clear on that,

F    or an economy that isn’t seeing enough
     revenue these days, the United States
certainly does have a lot of ways compa-
                                               ings “process” approach. Today compa-
                                               nies generally recognize revenue when it
                                               is realized (or realizable) and the earnings
                                                                                              and it may not reflect the economics of the
                                                                                              underlying transactions or provide use-
                                                                                              ful information to investors. The related
nies can try to recognize it.                  process is complete. The approach in the       costs of executing that two-year contract
    Currently, U.S. Generally Accepted         discussion paper is based on changes to        may be recognized long before the rev-
Accounting Principles and GAAPs’ re-           customer contract assets and liabilities. A    enue; the matching concept is not consid-
lated guidance have more than 180 rules        contract comprises rights and obligations.     ered in the proposal. For some companies
for revenue recognition (including the         Any unperformed rights and obligations         that have long operating cycles, this can
ones that conflict with others). Contrast      should be reported on a net basis as either    create significant volatility in the financial
                that with International        an asset or a liability. The transfer occurs   statements and cause a mismatch between
                Financial Reporting Stan-      when the customer receives control of the      revenues and expenses.
                dards, where the opposite      goods or services.                                Costs were scoped out of the discus-
                is true: IFRS has almost no        All contracts with customers, whether      sion paper, but many comment letters
                guidance for some transac-     written or oral, would be analyzed for         suggested that we can’t talk about one
                tions.                         contract assets (the right to receive pay-     side of the equation without addressing
                    Both extremes cause        ment for goods or services) and contract       the other, particularly as it relates to long-
                diversity     in   practice.   liabilities (the obligation to perform un-     term construction and programs.
                That’s alarming, because       der the contract). Revenue would be rec-
                when you look at common        ognized when the contract asset increases      Where We Can Agree
                reasons for restatements,
revenue recognition is frequently the
primary reason. Companies that have to
                                               or the contract liability decreases—that is,
                                               when the company satisfies performance
                                               obligations to a customer by transferring
                                                                                              M      any believe that a universal ap-
                                                                                                     proach to revenue recognition may
                                                                                              not make sense. Most also agree, however,
comply with myriad, complex rules may          goods or services.                             that the current plethora of approaches
make honest mistakes. Improper revenue             While this approach sounds straight-       isn’t the right answer either. Perhaps two
recognition is also a nifty way to commit      forward, it is very theoretical and much       or three models may be more appropriate?
fraud. Clearly, clarification and simplifi-    harder to apply in practice. This new con-     In particularly, a separate model for long-
cation is needed.                              cept will introduce more estimates into the    term contract accounting may be neces-
    In December 2008, both the U.S. Fi-        financial statements. Companies are going      sary for the reasons discussed above. Try-
nancial Accounting Standards Board and         to have to identify all of the performance     ing to s
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